LLC vs. S-Corp: What’s the Difference for Small Business Owners?
When you’re just starting your business, an LLC is usually the easiest and smartest choice. It’s flexible, protects your personal assets, and keeps your setup simple. But as your profits grow, you might be leaving money on the table if you don’t explore the S-Corp election.
When Does an S-Corp Make Sense?
According to tax expert Mark Kohler, the turning point is when your business is netting around $40,000–$50,000 or more in profit. At this level, switching to an S-Corp can save you thousands in self-employment taxes. Here’s how it works: with an S-Corp, you can split your income into two parts—your salary (which is subject to Social Security and Medicare taxes) and your owner distributions (which are not). You still keep your LLC status for legal protection, but the IRS now taxes you more efficiently.
Tips for Business Owners Considering the Switch:
Start simple. Launch with an LLC for ease and flexibility, then elect S-Corp when your profits justify it.
Salary matters. Pay yourself a “reasonable salary” to stay IRS-compliant.
Stay organized. S-Corps require payroll filings and more detailed bookkeeping, so plan ahead.
Seek professional advice. Every business is unique, and a bookkeeper or CPA can help you choose the right path.
The bottom line: an LLC keeps things simple in the early stages, but once your profits hit a consistent threshold, an S-Corp can be a powerful way to reduce taxes and grow with confidence.
