S-corp vs LLC: they're not competitors — one sits on top of the other
The short answer
The internet frames this as a versus battle. It isn't. An LLC is a legal entity your state creates — that's your liability shield. An S-corp is a tax status the IRS grants when an eligible entity files Form 2553. The real question is sequencing: form the LLC first (protection, simplicity, default pass-through taxation), then add the S election once consistent profit — commonly $60k–$80k+ — makes the self-employment-tax savings outrun the payroll and filing costs.
The actual decision, step by step
- Day one: form the LLC. Cheap, protective, and taxed simply by default (Schedule C for one owner).
- Growing: watch net profit. Below the breakeven zone, the S election mostly buys you costs and complexity.
- Consistent profit: run the real numbers — salary split, payroll costs, QBI interaction. If the math clears, elect (or fix it late if you should have).
- Special cases: California's franchise taxes and fees, professional licensing (PLLC rules), investors who'll demand a C-corp someday, and real estate — which usually should not sit inside an S-corp at all.
Where the internet steers people wrong
- "Start an S-corp for protection" — the election adds zero legal protection
- Electing at $25k of profit because a video said so, then paying $2,000/year in compliance to save $900
- Putting appreciating rental property inside an S-corp — a mistake that gets expensive on the way out
Frequently asked questions
Is an S-corp a type of company?
No — this is the core confusion. An LLC is a legal entity formed with your state; S-corp is a federal tax status an eligible LLC (or corporation) elects. Most 'S-corps' are LLCs that filed Form 2553.
So should I 'be' an LLC or an S-corp?
Usually both, sequentially: form the LLC for liability protection, then elect S-corp taxation when profit makes the payroll-tax savings beat the added costs — commonly around $60k–$80k of consistent profit.
Does an S-corp protect me legally?
No more than the LLC already does. Liability protection comes from the entity; the S election changes only taxation.
Can I undo an S-corp election?
Yes, elections can be revoked, but re-electing is restricted for five years — one more reason to elect deliberately rather than reflexively.
Not sure where you are on the curve?
Thirty minutes with your actual profit and state facts settles it — including whether this is the year to elect.
Book a free consultation