This is one of the most common questions small business owners ask, and one of the most commonly oversimplified online. Here's the honest version.
An LLC is primarily a legal structure. It separates your personal assets from your business liabilities. By default, the IRS taxes a single-member LLC exactly like a sole proprietorship, there's no automatic tax benefit just from forming one.
An S-Corp isn't a different legal entity, it's a tax election you can make for an LLC or corporation. Once elected, you pay yourself a "reasonable salary" through payroll, and only that salary is subject to self-employment tax. Remaining profit can be distributed without the additional 15.3% self-employment tax.
Where the real savings shows up: If your business nets $100,000 and a reasonable salary for your role is $50,000, only that $50,000 is subject to self-employment tax instead of the full $100,000.
Generally, once net profit is consistently well above what a reasonable salary for your work would be, often cited around $60,000 to $80,000 in profit, the tax savings start to outweigh the added costs and complexity. Below that, the extra overhead often isn't worth it.
This isn't a decision to make from a blog post (including this one). It depends on your specific income, your industry's "reasonable salary" benchmarks, and your state's rules. It's worth running real numbers before electing anything; it's a decision you can absolutely reverse if it stops making sense, but it's better to get it right from the start.
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