LLC vs. S-Corp: Which Business Structure Is Right for Your Startup?

Starting a business comes with a thousand decisions. One of the most important? Choosing the right business structure. Get it wrong, and you could end up paying more taxes, dealing with unnecessary paperwork, or even putting your personal assets at risk.

In this post, we will break down the key differences between LLCs and S-Corps in plain English—no legalese required. Whether you are launching a side hustle or scaling a startup in Utah, Arizona, or Texas, this guide will help you understand which structure fits your goals.

What Is an LLC?

An LLC, or Limited Liability Company, is one of the most flexible and popular business structures for small business owners. It provides a protective barrier between your personal finances and your business—so if the business gets sued or falls into debt, your home, car, and personal savings are generally off-limits.

From a tax perspective, LLCs are considered “pass-through” entities by default. That means the business itself does not pay federal income tax. Instead, profits and losses pass through to the owners (called “members”), who report them on their personal tax returns.

Key Advantages of an LLC:

• Simple to form and maintain – minimal paperwork
• Flexible management structure – run it yourself or bring in managers
• No ownership limits – unlimited members, including foreign nationals and other businesses
• Pass-through taxation – avoids double taxation
• Flexibility in profit distribution – can allocate profits in any way the members agree

What to Watch Out For:

• Self-employment taxes – all profits subject to FICA taxes (15.3%)
• State fees vary widely – some states charge high annual fees
• Less attractive to outside investors – VCs often prefer corporations

What Is an S-Corp?

An S-Corporation is not technically a type of business entity—it is a tax status that can be elected by an LLC or a corporation. When a business elects S-Corp taxation, it becomes subject to specific IRS rules that can offer significant tax advantages.

Like an LLC, an S-Corp is a pass-through entity, so profits go to shareholders’ personal tax returns. But the key difference lies in how owners pay themselves—and how that affects employment taxes.

Big Perks of an S-Corp:

• Self-employment tax savings – only salary (not distributions) is subject to FICA
• Pass-through taxation – avoids corporate-level tax
• Credibility – may appear more established to partners and lenders
• Clear ownership structure – stock-based ownership is straightforward

Potential Downsides:

• Strict requirements – max 100 shareholders, only U.S. citizens/residents
• Payroll obligations – must pay yourself a reasonable salary
• More formalities – corporate records, minutes, and meetings required
• Single class of stock – no preferred shares or complex equity structures

LLC vs. S-Corp: What Is the Real Difference?

Let us break this down by what most business owners actually care about:

1. Liability Protection:

Both structures offer solid liability protection. Your personal assets are shielded from business debts and lawsuits in either case—as long as you maintain proper separation between personal and business finances.

2. Taxes:

• LLC: All profits subject to self-employment tax (15.3%)
• S-Corp: Only salary is subject to employment taxes; distributions are not

3. Ownership and Structure:

• LLC: Unlimited members, flexible profit allocation, can include foreign owners
• S-Corp: Max 100 shareholders, must be U.S. citizens/residents, single class of stock

4. Paperwork and Compliance:

• LLC: Minimal formalities, operating agreement recommended but not always required
• S-Corp: Requires board meetings, corporate minutes, and formal recordkeeping

What About an LLC Taxed as an S-Corp?

Here is where things get interesting—and where a lot of business owners find their sweet spot.

An LLC is not locked into one method of taxation. While it is taxed as a sole proprietorship (for single-member LLCs) or partnership (for multi-member LLCs) by default, you can file IRS Form 2553 to elect S-Corp tax treatment.

So why would an LLC owner do that?

Because it can help you save on self-employment taxes.

Here is how it works: if your LLC is taxed as a sole proprietorship, then all of your business profits are subject to self-employment tax—roughly 15.3%. But with S-Corp tax treatment, only the salary you pay yourself is subject to that tax. Any additional profit you take as distributions is not subject to FICA.

That can mean big savings, especially if your business is bringing in steady, healthy profits.

Let us say your business earns $120,000 in profit. If you do not elect S-Corp taxation, you will pay self-employment tax on all $120,000. But if you elect S-Corp status and pay yourself a reasonable salary of $60,000, you only pay FICA on that salary—and the remaining $60,000 in distributions is free from self-employment tax.

Why Not Just Start as an S-Corp?

Because keeping the LLC structure gives you the best of both worlds:

• Flexibility in management and profit distribution
• Simpler compliance requirements at the state level
• Ability to revert to default LLC taxation if S-Corp treatment no longer makes sense
• No restrictions on ownership types

Of course, once you elect S-Corp tax treatment, you do need to run payroll, file additional tax forms, and pay yourself a “reasonable salary” as determined by the IRS. That adds complexity—but if the savings outweigh the added effort, it is worth it.

If you are not sure whether your business has reached the point where electing S-Corp taxation makes sense, we can help you run the numbers and make the right call.

How to Choose: Key Factors to Consider

When you are weighing whether to form an LLC or S-Corp, consider the following:

1. How You Want to Pay Yourself

Want to keep things simple and just draw profits directly? An LLC might suit you. Ready to run payroll and potentially save on taxes? Consider S-Corp status.

2. Growth Plans and Investors

If you are planning to bring on investors, raise venture capital, or scale nationally, you may eventually want a C-Corp. But if you are staying small or keeping things local, an LLC or S-Corp will serve you well.

3. Your State’s Rules

Some states impose higher fees on LLCs or do not fully recognize S-Corps. Texas, Utah, and Arizona all have their own rules. We can help you navigate the specific requirements in your state.

4. Admin Tolerance

Do you mind holding board meetings and keeping corporate minutes? If not, the S-Corp formalities will not bother you. If you prefer minimal paperwork, stick with a standard LLC.

How to Set One Up (Without Losing Your Mind)

To form an LLC:

1. Choose a unique business name that complies with your state’s requirements
2. File Articles of Organization with your state
3. Create an Operating Agreement (highly recommended even if not required)
4. Obtain an EIN from the IRS
5. Open a business bank account

To form an S-Corp:

1. Form a corporation or LLC first
2. File IRS Form 2553 within 75 days of formation (or by March 15 for calendar-year businesses)
3. Set up payroll to pay yourself a reasonable salary
4. Maintain corporate records and hold required meetings

Whichever you choose, make sure it matches your goals—not just for today, but for where you want to be in five years.

Final Thoughts: The Right Structure Is the One That Works for You

There is no one-size-fits-all answer when it comes to LLCs versus S-Corps. Both offer liability protection and pass-through taxation. The right choice depends on your income level, growth plans, ownership needs, and tolerance for paperwork.

If you are looking for simplicity, flexibility, and an easy way to get started, an LLC is often the best first step. If you are earning healthy profits and want to reduce self-employment taxes, electing S-Corp treatment may be the right move.

Need help deciding which structure is right for your business? Contact Jon Miller Law today to schedule a consultation. We work with startups and small business owners across Utah, Arizona, and Texas to help them build their businesses on solid legal foundations.