Almost every new business owner asks the same question within the first month: "Should I be an LLC or an S-Corp?" It's a fair question, but it's also the wrong question, because the right answer depends on a handful of facts about your specific business that you might not even know yet.
Here's the framing we use at TicTax when a new client asks.
First: LLC vs. S-Corp aren't actually competing options
LLC is a state-level legal entity. S-Corp is a federal tax election. They live in different parts of the law. You can be an LLC that is taxed as an S-Corp. You can be an LLC that is taxed as a sole proprietor. You can be a corporation taxed as an S-Corp. The two terms are constantly mashed together in casual conversation, and the conflation is where the confusion starts.
So the real questions are two, not one: What legal entity should I form? And how should that entity be taxed?
Sole proprietor: the default
If you start doing business and don't form anything, you're a sole proprietor. Income flows onto your personal 1040 via Schedule C. Self-employment tax (15.3%) applies to net profit.
Pros: zero setup. Cons: no liability shield. Every dollar of profit is hit with self-employment tax.
LLC taxed as sole proprietor (single-member LLC)
You form an LLC at the state level. The IRS, by default, ignores the LLC for federal tax purposes — a single-member LLC is a "disregarded entity." Your tax return looks identical to a sole proprietor's.
What changes is state law. The LLC creates a legal shield between your personal assets and business liabilities. For most one-person service businesses, this is the right starting point. Easy to file, easy to wind down, and the liability protection is meaningful.
LLC (or corporation) taxed as an S-Corp
Once your business is profitable enough that self-employment tax starts to hurt, the S-Corp election becomes interesting. The mechanics: you pay yourself a reasonable salary through W-2 payroll. The remaining profit flows to you as a distribution that isn't subject to self-employment tax.
The sweet spot tends to be net profit somewhere north of $50,000–80,000 a year, but the exact threshold depends on your salary, your state, and your other income. Below that, the cost of running payroll, filing the 1120-S, and keeping clean books often eats the savings.
Rule of thumb: if your business consistently nets less than what you'd pay yourself in salary anyway, an S-Corp election is probably premature. Ask a CPA before you make it.
C-Corporation
C-Corps are the right answer for a narrower set of situations: companies raising venture capital, companies that need to retain large amounts of earnings inside the business, and companies with foreign owners who can't be S-Corp shareholders. For most small businesses, the double-taxation problem (corporate tax plus personal tax on dividends) makes a C-Corp the wrong choice.
Partnership
Two or more owners who don't elect S-Corp status default to partnership taxation. Files a 1065. Issues K-1s to each partner. Useful for situations where ownership splits aren't proportional to capital contributions, or where you want flexibility in how income, deductions, and credits flow to owners.
How we walk the decision
When a new client comes to us, we generally cover four things before recommending an entity:
- Projected net profit for the next 2–3 years
- How much you actually need to pull out of the business each year
- Whether there are co-owners, and how the split is structured
- Whether liability exposure is real (services, e-commerce, contracting) or low (consulting from a laptop)
From there, the answer is usually clear within a 30-minute conversation. The wrong entity costs real money — both in extra tax and in compliance work you don't need. Getting it right the first time avoids a restructuring later.
If you're starting something new or wondering whether your current structure still fits, send us a note. Entity selection is one of the few decisions where a CPA's hour pays for itself many times over.