S-Corp vs LLC Guide

This is where most people get confused: an LLC and an S-Corp are not the same type of thing. An LLC is a state-level legal structure. An S-Corp is a federal tax election. They operate in different lanes.

This means you can have an LLC that is taxed as an S-Corp — which is actually the most common setup for creators and freelancers who want the best of both worlds:

• The legal simplicity and asset protection of an LLC
• The payroll tax savings of S-Corp treatment

So the question isn't always "S-Corp OR LLC" — it's often "LLC with or without S-Corp tax election."

A standard LLC (taxed as a sole proprietor or partnership by default) offers:

• Personal liability protection: Business debts and lawsuits generally can't touch your personal assets.
• Simple tax filing: Income passes through to your personal return. No separate corporate tax return required.
• Minimal formalities: No board of directors, no annual meetings, fewer compliance requirements than a corporation.
• Flexible ownership: Members can be individuals, corporations, other LLCs, or foreign nationals.

The drawback: All net profits are subject to 15.3% self-employment tax, which can be a significant cost as your income grows.

An LLC that has elected S-Corp tax treatment adds a powerful tax advantage:

• You split your income between a salary and distributions
• Only the salary portion is subject to payroll taxes (Social Security + Medicare)
• Distributions are not subject to self-employment tax

The tradeoff: More compliance. You must run payroll, file quarterly payroll tax deposits, and submit an annual Form 1120-S in addition to your personal return. You also need to pay yourself a "reasonable salary" — the IRS scrutinizes S-Corp owners who take artificially low salaries to minimize payroll taxes.

When it makes sense: When net profit consistently exceeds $40,000–$50,000 per year, the SE tax savings typically outweigh the added compliance cost.

Here's a simple framework:

• Net income under $40k/year: A standard LLC formation is usually the right choice. Simple, low-cost, minimal compliance.
• Net income $40k–$80k/year: Run the numbers. An S-Corp election may save you more than it costs — especially if you already have a bookkeeping system in place.
• Net income above $80k/year: An LLC taxed as an S-Corp is almost always the smart move. The tax savings are significant and the compliance costs are manageable with the right tools.

Otto can help you model the numbers for your specific income level and handle the transition to S-Corp status when the time is right. For an in-depth comparison, read our commercial S-Corp vs LLC breakdown.