How to Choose Between an LLC and an S-Corp in 2026

Compare LLC vs S-Corp tax treatment, self-employment savings, and operational complexity to pick the right structure.

1. Calculate your self-employment tax exposure. LLC owners pay 15.3% self-employment tax on all net business income. S-Corp owners pay it only on reasonable salary, not distributions. If your net income is $80,000, LLC costs $12,240 in SE tax vs S-Corp's $6,120 on a $40,000 salary plus tax-free distributions.
2. Set a reasonable salary benchmark. IRS requires S-Corp owners to pay themselves reasonable compensation before taking distributions. Use 35-50% of net income or industry salary data. A $100,000 profit business might require a $40,000-50,000 salary, limiting SE tax savings.
3. Price the compliance overhead. S-Corps require payroll processing, quarterly 941s, annual 1120S filing, and state franchise fees. Budget $3,000-5,000 annually vs LLC's $800-1,500 for basic tax prep. Add $2,000-3,000 for monthly payroll if you handle it externally.
4. Test ownership and investment flexibility. LLCs accept unlimited owners, foreign investors, and different profit-sharing arrangements. S-Corps cap at 100 US citizen/resident shareholders with identical stock rights. Choose LLC if you plan investor rounds or complex ownership structures.
5. Run the breakeven analysis. S-Corp saves 15.3% on income above reasonable salary minus additional compliance costs. At $60,000 net income with $30,000 salary, you save $4,590 in SE tax but spend $3,500 more in compliance. Net benefit: $1,090. Scale improves the math.
6. Consider state-specific factors. Some states don't recognize S-Corp elections or charge additional franchise taxes. California's $800 minimum franchise tax hits both entities. Nevada and Texas favor LLCs. Check your state's tax treatment before deciding.