LLC vs. S corp: you may be asking the wrong question.

Separate the entity from the tax treatment

An LLC is an entity created under state law. S corporation status is a federal tax classification available to eligible entities. That means an LLC and an S corporation are not always competing choices: a business can be both.

For federal income tax, a domestic single-owner LLC is generally disregarded by default, while a multi-owner LLC generally defaults to partnership treatment. An eligible LLC may elect S corporation treatment using Form 2553; it generally does not need a separate Form 8832 first.

Look past a single profit threshold

There is no one profit number that makes an S election right for every business. A useful comparison starts with expected profit, supportable owner compensation, the cost of payroll and tax preparation, and state treatment.

Consider two owners with the same profit. One spends nearly every working hour delivering the service that earns the revenue. The other has a team delivering much of the work. Their compensation analysis and the economics of an election may differ. This is a planning example, not a salary recommendation.

Ask these questions before electing

Use the answers as a discussion agenda with your tax adviser.

• Is the ownership structure eligible for an S election?
• What work does each owner perform, and what would comparable work pay?
• How stable is the profit forecast?
• What will payroll, bookkeeping, tax returns, and state obligations cost?
• Who will own the recurring compliance tasks?

Turn the comparison into a decision

Start with the employment-tax illustration, then have the full income-tax and state-tax picture reviewed. A favorable calculator result is a reason to investigate—not an instruction to file an election.