LLC vs S-Corp: How to Choose the Right Entity Structure and Save Thousands
Starting a business is exciting! It’s also confusing. As licensed tax professionals, the advisors at AMD are here to make it a little easier.
In this guide we break down:
what a business entity is
why it is required by the IRS
pros and cons of electing a sole proprietor vs. LLC vs. S-corp
how choosing the right structure can save you thousands (yes, thousands) of dollars every year
What is a Business Entity and Why Do I Need It?
All businesses, whether employing one person or many, must make a business entity election.
A business entity, also known as a legal entity or business structure, does two main things:
Tells the IRS how to tax your income
Determines your personal level of liability if something goes wrong in your business
The IRS doesn't give you a choice in this matter. Whether you're selling handmade crafts on Etsy or closing million-dollar real estate deals, you must choose how your business gets taxed. Ignore this decision and the IRS will make it for you—defaulting you to sole proprietorship, which often means higher taxes and zero liability protection.
Think of your business entity as the foundation of your financial house. Get it right from the start, and everything else builds smoothly. Get it wrong, and you'll spend years fixing the damage by paying more in taxes and unnecessarily risking your personal assets.
What are the Differences Between Sole Proprietorships, LLCs, and S-Corps
Sole Proprietorship
A sole proprietorship is the default business structure when you start earning money and don't formally create any other entity. It's the simplest option—no paperwork, no filing fees, no separate bank accounts required.
The Good:
Zero setup costs or complexity
Complete control over business decisions
All profits go directly to you
Simple tax filing (just add Schedule C to your personal return)
The Bad:
Zero liability protection (your personal assets are exposed to business risks)
Self-employment tax on ALL profits (15.3% on top of income tax)
Harder to get business loans or establish business credit
No separation between personal and business finances
Most successful business owners quickly outgrow sole proprietorship once they understand the risks and tax implications. It's fine for testing business ideas or very small side hustles, but it becomes expensive and risky as income grows.
LLC
The concept of the LLC (Limited Liability Company) does exactly what you might think: limit one’s liability. An LLC creates a legal wall between your business and your personal life. If someone decides to sue you, they can only go after what’s inside the LLC. They can’t touch your house, your savings account, your retirement, your kid's college fund, or your ongoing Starbucks habit.
But here's the catch: the protection only works if you actually treat your LLC like a separate business. That means:
Get a business bank account (simple)
Run all your income and expenses through that account
Keep records (invoices, receipts) like you mean it
If you skip these steps and find yourself with a lawsuit, the court can “pierce the corporate veil” - a fancy term that means because you didn’t treat your LLC like a real business, it can’t protect you like one either.
Example: a landlord found to exercise gross negligence in their duties as an owner, may be held personally liable for damages.
💡 In most cases, AMD recommends that an LLC is created THE MOMENT the business is started, even if you only make $100 that year. It is crucial to have that liability protection so if something goes awry, you can deal with the issue without losing personal assets.
Luckily, setting up an LLC is easy. Here are the basics:
Confirm your business name is available in the state you wish to operate
Submit Your Articles of Operation
Register with the State
Create an Operating Agreement
Get Your EIN
Set Up Your Business Bank Account
Get to Work!
Need assistance? AMD routinely sets up LLCs for its clients. We also check for special circumstances (such as payroll, permit, or sales tax requirements) to ensure your LLC is compliant.
S-Corp
Where LLCs provide an advantage over sole proprietorship in offering liability protection, S-Corps provide an advantage over LLCs in significantly reducing what businesses owe in taxes through the elimination of self-employment tax.
When you worked your W-2 job, you saw Social Security and Medicare taxes come out of your paycheck automatically (about 7.65% of your wages). Your employer quietly matched that amount and sent the government a total of 15.3%.
But now that you’re self-employed (whether as an LLC or a sole proprietor), the IRS forces you to pay both sides - the employee side and the employer side. So, all 15.3% comes straight out of your pocket. Hello, self-employment tax.
Example:
If you're in a 30% tax bracket and you made $100,000 profit last year, you don't just owe $30,000. You owe $30,000 in income tax plus $15,300 in self-employment tax. That's $45,300 total—nearly half of what you earned.
Yikes.
This is the single biggest hidden cost most business owners don’t know about. Luckily, it’s also one of the easiest to eliminate through properly structuring your business entity as an S-Corp.
💡 AMD closely monitors its business clients’ growth and goals and recommends the entity transitions from an LLC to an S-Corp as soon as:
there’s consistent annual profit of around $50,000+
you’re getting killed by outrageous tax bills and can’t figure out how to get control of it
the extra time and resources spent on admin is worth the thousands of dollars in tax savings every year
you want to build a legacy for your family, and want your business to help you get there
What About Liability Protection Under an S-Corp?
Fear not. The same separation between personal and business assets that exists as an LLC is the same for S-corps. The only difference is that with S-Corps, you get liability protection plus the self-employment tax elimination.
Additional S-Corp Benefits:
Beyond cutting your tax bill, S-Corp election forces better business practices: regular payroll, formal record-keeping, clear separation between business and personal finances. These habits protect your liability shield and make your business more valuable if you ever want to bring in partners or sell.
Plus, there's something to be said for the psychological shift. When you're paying yourself a regular salary and taking distributions, you start thinking like a business owner instead of just a high-earning employee. That mindset shift often leads to better business decisions across the board.
Why Didn’t My Other Accountant Suggest S-Corp Election?
S-Corps do come with more rules, regulations, and responsibilities, but with the right team, a structured admin schedule, and a clear plan, managing your S-Corp is no more difficult than running your LLC. Here are some reasons you may not have known your business is eligible for S-Corp election:
Many accountants focus on tax preparation, not tax advising. They’re great at filing reports on time, but they don’t model scenarios, develop long-term tax strategies, or assist with things like retirement or insurance planning. Many believe the energy expended outweighs the benefit gained - but for AMD, the “energy” required to save you the most money is what we find the most rewarding.
S-Corps require you to pay yourself a “reasonable” compensation. If you set it too low, it’s an audit risk. Tax preparers don’t always have the time to help their client determine what this wage should be, so they avoid it altogether.
S-Corps add fixed overhead costs. They require payroll runs, quarterly payroll filings, W-2s, S-Corp tax return, clean books, and more. If the accountant doesn’t have a team in place or if the client is uneducated in how to collaborate with their accountant to ensure seamless systems, some may view this as an administrative headache not worth engaging in.
Lack of education. While all accountants understand the key differences between entity structures, not all are up to speed on the ever-changing tax code, especially simple tax preparers who focus primarily on straightforward 1040 and Schedule C work.
💡 AMD specializes in Tax Advising, allowing us to set up a tax strategy that grows with you and your business as it evolves. We’ve chosen to adopt a subscription service model for our clients, where fixed overhead costs (bookkeeping, payroll, records, etc.), regular one-on-one advising, and tax return preparation (personal and business) costs are spread out throughout the year as a single monthly fee. We’ve found this dramatically reduces errors, omissions, and surprises.
How to Transition an LLC to an S-Corp
Businesses that are already LLCs can elect to be taxed like an S-Corporation under the Internal Revenue Code. Again, this does not change your liability protection; it simply changes how the IRS treats your income.
The IRS also allows companies to retro-activate the election back to January 1st of the current year, if the LLC was already in place on or before January 1st of that year. So, if your year started out kind of slow and then your profit really took off - give us a call. It might be time to consider a restructuring.
Under normal LLC taxation, every dollar of profit gets hit with both income tax and self-employment tax. Under S-Corp taxation, only your salary (that “reasonable” compensation number) gets hit with self-employment tax. The rest comes to you as distributions, which are only taxed as normal income tax.
Example: $100,000 net profit at 30% tax bracket:
Regular LLC Taxation
Salary: Business Income = $100,000
Income Tax = $30,000
Self-Employment Tax = $15,300
Total tax liability = $45,300
S-Corp Taxation
Salary: W2 “Reasonable Compensation” = $60,000; Distributions = $40,000
Income Tax = $18,000 on Salary + $12,000 on distributions
Self-Employment Tax (on Salary only): $9,180
Total tax liability = $39,180
Without doing ANYTHING else (and there is much else you could do), you just saved $6,120. As your income grows, those savings get bigger. Much bigger.
💡Want to see what your own chart could look like? Book a Discovery Call today.
Steps to Choose the Right Entity Structure for Your Business
You don't have to figure all this out on day one. AMD will help you set it up and establish an easy management plan so you stay in compliance without wanting to pull your hair out every month!
Here's the roadmap:
Right now: If you’re a Sole Proprietor, set up your LLC and business bank account. Start tracking everything properly. This creates the foundation for both liability protection and future tax optimization.
When you hit consistent $50k+ profit: Run the S-Corp numbers. If the tax savings exceed the compliance costs by a meaningful margin, make the election.
Every year after: Reevaluate. Your business will change, tax laws will change, your income will (hopefully) grow. What makes sense today might not make sense in three years, and that's fine.
The beauty of this approach is flexibility. You can revoke the S-Corp election if it stops making sense. You can adjust your salary as your income changes. Nothing is set in stone.
Ready to stop getting blindsided by self-employment tax?
Let's run your numbers and see what makes sense for your specific situation. Because when it comes to taxes, one size definitely doesn't fit all.
Disclaimer: The content provided on this blog is for informational and educational purposes only. AMD Tax Advising & Accounting does not provide legal, tax, or financial advice through this platform. Readers should not interpret any information here as a substitute for professional consultation tailored to their specific circumstances. Acting on generalized information without proper guidance may result in unintended financial consequences, including penalties and interest assessed by the IRS or other taxing authorities. Before making decisions or taking action, please consult directly with a qualified tax advisor, accountant, or attorney. AMD Tax Advising & Accounting expressly disclaims any liability for actions taken or not taken based on the content of this blog.