The letters after your business name aren’t just paperwork — they decide how every dollar of profit is taxed. Choosing well can be worth five figures a year.
Most owners pick an entity once, at the very beginning, and never look at it again. That’s a mistake. The right structure depends on how much you earn, how you pay yourself, and where you’re headed — and the gap between a good choice and a default one shows up on every return for the life of the business.
The short version
A single-member LLC is simple. By default it’s taxed as a sole proprietorship: all of the profit flows to your personal return and all of it is subject to self-employment tax — the 15.3% that covers Social Security and Medicare. For a side business or a company still finding its feet, that simplicity is usually worth it.
An S-corporation changes the math. You become an employee of your own company, pay yourself a reasonable salary, and take the remaining profit as a distribution. That distribution isn’t subject to self-employment tax — which is where the savings come from.
On $150,000 of profit, splitting it into a $90,000 salary and $60,000 distribution can save roughly $9,000 in payroll taxes a year — every year — versus running the same income through a default LLC.
So why isn’t everyone an S-corp?
Because it isn’t free. An S-corp means running payroll, filing a separate return (Form 1120-S), and defending a reasonable salary to the IRS. Those costs are real, and below a certain profit level they outweigh the savings.
A rough rule of thumb
- Under ~$40,000 of net profit: the S-corp overhead usually isn’t worth it yet.
- $40,000–$80,000: it’s a real conversation — run the numbers both ways.
- Above ~$80,000 of stable profit: the election typically pays for itself several times over.
It’s not permanent
The best part: entity choice isn’t a one-time decision. An LLC can elect S-corp treatment when the profit justifies it, and the structure can keep evolving — holding companies, multiple entities, and other layers — as the business grows. The point is to revisit it deliberately, not to set it and forget it.
If you’re not sure your current structure still fits, that’s exactly the kind of thing we model in a planning session — usually in an afternoon, often worth far more than it costs.