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Owners ask us "should I be an LLC or an S corp?" as if they were two doors. They are not. An LLC is a legal structure the state gives you. An S corporation is a tax treatment the IRS lets certain businesses choose. An LLC can be taxed as an S corporation, and many are. Once that clicks, the decision gets much easier to think about.
The LLC is the legal container
A limited liability company is registered with your state. It separates the business from you as a person: contracts, debts and lawsuits belong to the company, not to your house, as long as you keep the two apart. That protection is the main reason to form one, and it has nothing to do with taxes. The LLC formation page covers how we set one up for Utah businesses.
How an LLC is taxed if you do nothing
By default, the IRS ignores the LLC for income tax and looks at who owns it.
A single-member LLC is treated as a sole proprietorship. The business profit goes on a Schedule C with your personal return, and you pay income tax plus self-employment tax on the whole profit.
A multi-member LLC is treated as a partnership. The LLC files an information return, Form 1065, and each owner receives a Schedule K-1 showing their share of the profit, which they report on their own return.
In both cases the profit is taxed whether or not you took it out of the business, and there is no payroll for the owners: you take draws, not a salary.
What an S corporation election changes
An LLC can ask the IRS to be taxed as an S corporation by filing Form 2553. From then on the LLC files its own return, Form 1120-S, and sends each owner a K-1, but the big change is in how owners get paid.
An owner who works in the business must be paid a reasonable salary through payroll, with the usual withholding and payroll taxes. Whatever profit remains after that salary can be taken as distributions, and distributions are not subject to self-employment tax. That gap is the entire appeal of the election: part of what you earn stops carrying the Social Security and Medicare portion.
The word doing the work in that paragraph is reasonable. The salary has to reflect what the job would pay someone else. Paying yourself a token salary to push everything into distributions is the thing the IRS looks for.
What the election costs to run
The savings come with new obligations, and they are not free.
You now run payroll, even if you are the only employee, with deposits and quarterly and annual filings. A separate business return has to be prepared every year. The books have to be clean enough to show salary, distributions and retained profit clearly; a shoebox will not do. And some states treat S corporations differently from the federal rule, which is one more thing to check.
When it tends to make sense
The honest answer is that it depends on how much profit the business makes beyond a reasonable salary for the work you do, and on what the payroll, bookkeeping and extra return cost you. When the profit comfortably exceeds that salary, the election often pays for itself. When the business is new, uneven, or barely covers your own pay, it usually does not, and the added paperwork is a burden for no benefit.
There are also non-tax reasons to wait: an S corporation limits who can own shares, allows one class of stock, and makes bringing in a partner or an investor more rigid than a plain LLC.
We are deliberately not giving a dollar threshold. The right number depends on your salary, your state, your other income and your plans, and a figure copied from a web page is how owners end up with payroll they did not need.
How Choice handles it
If the election fits, we file it: the S corporation election filing is a one-time service listed on the advisory and tax page, $300 plus shipping. Payroll setup and supervision covers the owner's salary once it exists, monthly bookkeeping keeps salary and distributions straight, and the business return is prepared and reviewed within the same firm. If the election does not fit yet, we say so and revisit it when the numbers change.
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Questions about this topic
Can I switch an existing LLC to S corporation taxation?
Yes, by filing Form 2553. The IRS has deadlines for when the election takes effect, so the timing is worth planning rather than discovering.
Does an S corporation protect me more than an LLC?
No. Liability protection comes from the legal entity, which is still the LLC. The S corporation election only changes how the income is taxed.
Do I still need a business bank account and bookkeeping?
More than before. The election requires showing salary, distributions and profit clearly, so mixed accounts or records that are months behind undo the benefit.
Written by the team at Choice Business Advisors, a bookkeeping, tax, and advisory firm based in Utah serving small businesses across the United States in English and Spanish.