Why you should form a S Corp NOT a LLC.

Maria Andreotti
Jun 30
2 min read

Why S Corporations May Be More Beneficial Than LLCs for Small Business Owners

When choosing a business structure, many entrepreneurs weigh the pros and cons of Limited Liability Companies (LLCs) and S Corporations (S Corps). While both offer limited liability protection and pass-through taxation, S Corporations can provide added tax advantages and operational benefits that make them the smarter choice in certain scenarios. Here's why:

1. Potential for Lower Self-Employment Taxes

One of the main reasons small business owners switch from an LLC to an S Corporation is self-employment tax savings.

With an LLC, all business profits are typically subject to self-employment taxes (Social Security and Medicare), which can be as high as 15.3%. However, S Corporation owners can split their income into:

Reasonable salary (subject to payroll taxes)
Distributions (not subject to self-employment taxes)

This allows business owners to potentially reduce their overall tax burden legally, as long as they pay themselves a reasonable salary in compliance with IRS guidelines.

2. Attractive to Investors and Lenders

S Corporations often look more structured and “formal” in the eyes of investors and lenders. Their governance (requiring officers, directors, and meetings) may seem more stable and predictable compared to a single-member LLC. For businesses seeking capital or financing, this formality can work in their favor.

3. Simplified Ownership Transfers

Ownership in an S Corporation is generally easier to transfer than in an LLC, where member approval may be needed. This is especially helpful in succession planning or when bringing in new partners or investors.

4. Clearer Payroll and Benefits Setup

Because S Corporations are required to pay owners a salary, they often set up formal payroll systems, retirement plans, and health benefits. This can provide clarity and consistency for tax planning, employee compensation, and financial forecasting.

5. Audit Risk May Be Lower

While audit risk is never zero, historically, sole proprietors and single-member LLCs face higher audit rates compared to S Corporations. A properly structured S Corporation may reduce red flags and add a layer of professionalism that appeals to the IRS.

When an LLC Might Still Be Better

While S Corporations offer many benefits, they’re not for everyone. LLCs can be more flexible in terms of ownership and are easier to set up and manage in the early stages of a business. Also, not all businesses qualify for S Corporation status, such as those with foreign owners or more than 100 shareholders.

Final Thoughts

Choosing between an LLC and an S Corporation is a critical decision that affects your taxes, liability, and how you operate. In many cases, starting as an LLC and later electing to be taxed as an S Corporation (Form 2553) can offer the best of both worlds.

At M&P Tax Service and Consultants, we specialize in helping business owners make smart tax and entity decisions. If you’re unsure about your current structure—or wondering if switching to an S Corporation could save you money—schedule a consultation with us today.