What actually changes when you elect S-corp status, and when it's worth it.
Published July 2026 · General information, not personalized tax advice — see note below.
This is the most common point of confusion: LLC is a legal/liability structure created under state law, while S-corp is a federal tax election. An LLC can elect to be taxed as an S-corp — it doesn't have to become a different type of entity to do it. So the real question usually isn't "LLC or S-corp," it's "should my existing (or planned) LLC elect S-corp tax treatment."
By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership — all profit passes through to the owner(s) and is subject to self-employment tax on the full amount, in addition to income tax.
Under an S-corp election, an owner who actively works in the business must be paid a "reasonable salary" as a W-2 employee, subject to payroll taxes. Any remaining profit can be distributed to the owner without being subject to self-employment tax — which is the source of the potential savings. The catch is that "reasonable salary" isn't a number you pick; the IRS expects it to reflect what the role would actually pay on the market, and setting it too low specifically to dodge payroll tax is a well-known audit trigger.
Broadly, the S-corp election becomes worth considering once a business is consistently profitable enough that the self-employment tax savings on distributions meaningfully outweigh the added cost and complexity — running actual payroll, filing a separate business return, and more careful bookkeeping. Below a certain profit level, the added compliance cost can eat the whole benefit. There isn't a single dollar figure that's right for every business; it depends on the owner's salary requirement, the business's profit, and its state.
An S-corp election means a separate tax return (Form 1120-S) in addition to the owner's personal return, formal payroll for any owner-employee, and generally more disciplined bookkeeping to keep salary and distributions clearly separated. None of this is a reason to avoid the election if the numbers support it — but it's real ongoing cost, not a one-time decision.
The right structure depends on your actual profit level, how much you'd reasonably need to pay yourself as salary, and your state's specific rules — this is exactly the kind of decision worth running the numbers on with an actual accountant rather than going by a rule of thumb from the internet.
A note on this article: this is general information, not tax, legal, or accounting advice for your specific situation. Entity and election rules are set by the IRS and by Maryland law and can change — always confirm current requirements at IRS.gov, or talk with our team before making a structure decision.