LLC or S-Corp? How to Set Up Your Business to Save Money and Protect Yourself

1. What’s an LLC?

A Limited Liability Company (LLC) is a flexible business structure that combines the liability protection of a corporation with the simplicity and pass-through taxation of a partnership.

Key Features

• Liability Protection
  Owners (called “members”) aren’t personally on the hook for business debts or lawsuits.
  
  

• Pass-Through Taxation
  Profits and losses flow through to members’ personal tax returns—no double taxation.
  
  

• Flexible Management
  Can be member-managed (owners run it) or manager-managed (you appoint managers).
  
  

• Fewer Formalities
  No required annual meetings or minutes (though best practice is to document major decisions).
  
  

How to Start an LLC

1. Pick a Name
   
   

• Must be unique in your state and include “LLC” or “Limited Liability Company.”
  
  

2. File Articles of Organization
   
   

• Submit with your Secretary of State (fee: ~$50–$300 depending on state).
  
  

3. Create an Operating Agreement
   
   

• Internal rules: ownership percentages, voting rights, profit splits, member exit rules.
  
  

• Not always required by law—but vital to prevent disputes.
  
  

4. Get an EIN (Employer Identification Number)
   
   

• Free from the IRS; needed for taxes, opening a business bank account, hiring.
  
  

5. Open a Business Bank Account
   
   

• Keeps personal and business finances separate (critical for liability protection).
  
  

6. Register for State Taxes & Licenses
   
   

• Sales tax permit, state employer taxes, local permits—depends on your location and industry.
  
  

7. Maintain Compliance
   
   

• File your annual (or biennial) report with the state; keep basic records of major business decisions.
  
  

2. What’s an S-Corp?

An S Corporation (S-Corp) is not a business type you form from scratch—it’s a tax status you elect (for either an LLC or a corporation) that changes how the IRS taxes you.

Key Features

• Pass-Through Taxation with Salary Requirement
  Owners (shareholders) must be paid a “reasonable salary” on which payroll taxes are withheld; remaining profits can pass through as distributions (which may save on self-employment taxes).
  
  

• Ownership Restrictions
  
  

• Up to 100 shareholders; all must be U.S. citizens or residents.
  
  

• Only one class of stock.
  
  

• Corporate Formalities
  
  

• Required annual shareholder meetings and board meetings, with minutes.
  
  

• Zeroing out retained earnings is typical (profits get paid out or retained formally).
  
  

How to Elect S-Corp Status

1. Form Your Entity
   
   

• Either start an LLC (as above) or incorporate as a C-Corp in your state.
  
  

2. File IRS Form 2553
   
   

• Must be signed by all shareholders/members within 75 days of formation (or by March 15 for existing entities).
  
  

3. Set Up Payroll
   
   

• Register for state and federal payroll taxes; withhold Social Security, Medicare, unemployment taxes on your salary.
  
  

4. Adopt Corporate Bylaws / Minutes Book
   
   

• Even if you formed an LLC, treat it like a corporation for governance: hold meetings, record minutes, issue/share certificates if you formed a corporation.
  
  

5. Maintain Compliance
   
   

• File Form 1120-S (the S-Corp tax return) annually by March 15.
  
  

• Keep up with state franchise taxes or annual reports (varies by state).
  
  

3. Head-to-Head Comparison

4. Which One Fits You?

• Choose an LLC if:
  
  

• You want fast, low-cost setup and minimal paperwork.
  
  

• You’re early stage or your profits are modest.
  
  

• You value flexibility in management and ownership structure.
  
  

• Choose S-Corp Status if:
  
  

• You’re generating steady, substantial profits (so payroll-tax savings on distributions matter).
  
  

• You don’t mind the extra bookkeeping (payroll, meetings, minutes).
  
  

• You have fewer than 100 U.S.-resident owners and only need one class of stock.
  
  

Next Steps:

1. Decide roughly what your first-year revenue and profits might look like.
   
   

2. Run a quick tax estimate: calculate self-employment tax on LLC vs. payroll + distributions under S-Corp.
   
   

3. If savings look promising (and you’re ready for the admin), form an LLC now and file for S-Corp election within 75 days—otherwise stay as an LLC.