S-Corp vs. LLC: How to Save Thousands on Taxes with the Right Choice

Choosing the right business entity can make or break how much you pay in taxes. You might be overpaying because you started with the wrong entity or didn’t optimize your current structure for tax purposes. So, which is right for you: LLC or S-Corp?

Here’s the scoop.

LLC: Flexibility and Protection

An LLC (Limited Liability Company) is like the Swiss Army knife of business entities. It’s flexible, easy to manage, and offers liability protection. If your LLC gets sued or raises debt, your assets—like your house or savings—are generally protected.

LLCs also come with pass-through taxation. This means the company doesn’t pay taxes on profits; instead, those profits “pass-through” to your tax return. That’s fewer tax headaches for you.

If you’re a small business owner who likes to keep things simple and retain control, an LLC might feel like a cosy fit. It’s relatively easy to set up, requires less paperwork, and lets you choose how you run the show—whether by yourself or partners.

S-Corp: Tax Savings for the Win

An S-Corp is a bit more formal, but it can deliver some significant tax savings. Like an LLC, an S-Corp also provides limited liability protection. The key difference? How you’re taxed.

In an S-Corp, you pay yourself a salary, and the rest of your profits come in as distributions, which aren’t subject to self-employment tax. That means a smaller tax bill. But it’s not all sunshine and rainbows—there’s more paperwork, and stricter regulations, and you’ll need to hold shareholder meetings and maintain records.

Let’s say you net $100,000 in profit. If you’re running an LLC, you could see $15,300 in self-employment taxes. But in an S-Corp, if you pay yourself a $50,000 salary, you’ll only pay self-employment tax, which comes to $7,650. The rest—$50,000—escapes the self-employment tax.

So, Which Should You Choose?

If you’re starting and reinvesting into your business, an LLC might be the better option. You get flexibility, protection, and the ability to grow without stressing too much about taxes right away.

But once you start making serious profits—think $100,000 or more—consider switching to an S-Corp to save on taxes. The tax savings alone might make all that extra paperwork worth it.

Now, if you’re a passive owner, meaning you don’t spend more than 10 hours a week in the business, you might avoid self-employment taxes altogether, whether you’re an LLC or S-Corp. Even better, if you’re in a rental company (leasing equipment or properties), you can dodge those taxes too.

Conclusion

There’s no one-size-fits-all answer when it comes to LLC vs. S-Corp. The right choice depends on your business goals, profits, and how involved you are in the day-to-day operations. Take a hard look at where you’re at now and where you want to go—and don’t hesitate to consult with a tax professional to help make the best decision for your business.

The tax savings could be substantial, so choose wisely!