Should I form an LLC or S-Corp for my small business?

The first thing to understand is that LLC and S-Corp aren’t really an either/or choice. An LLC is a legal business structure that you register with the state. An S-Corp is a tax classification that you elect with the IRS. You can form an LLC and then choose to have it taxed as an S-Corp. Most small business owners who operate as an “S-Corp” actually have an LLC with an S-Corp tax election on file. These are two separate decisions, not competing options.

Starting as a single-member LLC is the simplest path for most new businesses. You get liability protection, minimal paperwork, and straightforward taxes. Your business income passes through to your personal return, and you pay self-employment tax of 15.3% on all your net profit. For businesses earning modest amounts, the simplicity is worth more than any potential tax savings from a different structure. A business formation that matches your current situation is always better than one you’re hoping to grow into.

The S-Corp election starts making financial sense when your business is consistently profitable, typically somewhere around $50,000 to $60,000 or more in annual net profit. Here is why. As an S-Corp, you pay yourself a reasonable salary, and only that salary gets hit with payroll taxes. The remaining profit passes through to you as a distribution, which avoids self-employment tax entirely. If your business nets $100,000 and you pay yourself a $55,000 salary, you avoid self-employment tax on the $45,000 in distributions. At 15.3%, that is roughly $6,900 in savings.

But “reasonable salary” is a real requirement that the IRS takes seriously. Your salary needs to reflect what someone in your role and industry would actually earn. S-Corp owners who pay themselves $20,000 while taking $80,000 in distributions are asking for trouble. Setting it too low is one of the fastest ways to attract IRS attention.

The S-Corp election also adds compliance costs. You need to run payroll for yourself, which means processing fees, quarterly tax filings, and W-2s at year end. You also need to file a separate business tax return (Form 1120-S), which costs more to prepare than a Schedule C. Between payroll and the additional return, expect to spend $2,000 to $4,000 more per year. So the self-employment tax savings need to clearly exceed those added costs, or you are paying more for the privilege of a more complicated structure.

There are practical considerations beyond taxes as well. S-Corps have stricter rules around ownership and distributions. You need to maintain corporate formalities. If you plan to bring in investors or want different classes of ownership down the road, an S-Corp has limitations that a standard LLC does not.

For most small business owners in the Tampa Bay area, the right path is to start with an LLC and revisit the S-Corp election once your profitability justifies it. This is not a permanent decision. You can elect S-Corp status later when the numbers work, and you can revoke it if your circumstances change.

The best move is to have a CPA run the numbers based on your actual income and expenses. The break-even point depends on how much you earn, what industry you are in, and what a reasonable salary looks like for your role. A generic rule of thumb gets you in the ballpark, but the specifics matter. Getting your small business bookkeeping in order first gives you the accurate profit numbers you need to make this decision with confidence rather than guesswork.