“Should I be an LLC or an S corp?” is one of the most common questions we hear from small business owners. Part of the confusion is that the two aren’t really alternatives. An LLC is a legal structure you form with the state. An S corporation is a tax election you make with the IRS. You can be one, the other, or both.
Here’s how the three most common setups compare.
Sole proprietorship
A sole proprietorship is the default when one person starts doing business without forming an entity. There’s nothing to form at the state level, though in Washington you still need a business license, and you may need a trade name if you operate under a name other than your own.
- Liability: No separation. Your personal assets (home, savings, vehicles) can be reached for business debts and lawsuits.
- Taxes: Business profit goes on Schedule C of your personal return. You pay income tax plus self-employment tax on all of it.
- Best for: Testing an idea or running a very small, low-risk side business.
Limited liability company (LLC)
An LLC is a legal entity you form with the state. Its main job is protection: it puts a wall between your business and personal assets, as long as you keep finances separate and follow the rules.
- Liability: Generally protects personal assets from business debts and claims.
- Taxes: By default, the IRS treats a single-member LLC exactly like a sole proprietorship (Schedule C, full self-employment tax). Multi-member LLCs file as partnerships.
- Best for: Most small businesses that want liability protection with simple tax filing.
S corporation
An S corp is a tax status, not a type of entity. An LLC (or a corporation) can elect it by filing IRS Form 2553. Once you elect it, you become an employee of your own business.
- Liability: Same as the underlying LLC or corporation.
- Taxes: You pay yourself a reasonable salary through payroll, with Social Security and Medicare withheld. Remaining profit can be taken as distributions, which aren’t subject to self-employment or payroll tax. Income tax still applies to all of it.
- Extra requirements: Running payroll, quarterly payroll filings, W-2s, a separate business tax return (Form 1120-S), and cleaner bookkeeping.
- Best for: Profitable businesses where the payroll tax savings outweigh the added cost and paperwork.
Example: single-member LLC vs. S corp
Let’s say your business earns $120,000 in net profit in 2026.
As a single-member LLC (default tax treatment)
Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare), applied to 92.35% of net profit:
- $120,000 × 92.35% = $110,820
- $110,820 × 15.3% = about $16,955 in self-employment tax
As an LLC taxed as an S corp
You pay yourself a $60,000 salary and take the remaining $60,000 as distributions:
- Payroll taxes on salary: $60,000 × 15.3% (employee + employer share) = $9,180
- Payroll tax on the $60,000 in distributions: $0
The difference: about $7,775 less in Social Security and Medicare tax.
But that’s not the whole picture
From that savings, subtract the cost of running an S corp:
- Payroll processing
- A separate business tax return
- State payroll obligations such as unemployment insurance, workers’ comp (L&I) and paid family leave
- More bookkeeping and year-end work
These costs can easily eat a meaningful share of the savings, especially at lower profit levels. Lower Social Security wages can also mean a smaller Social Security benefit in retirement, and an S corp salary can change how much of the qualified business income (QBI) deduction you get.
About “reasonable salary”: The IRS requires S corp owners who work in the business to pay themselves a salary comparable to what they’d pay someone else to do the job. Setting it artificially low to avoid payroll tax is a common audit target. The $60,000 above is for illustration only. Your number depends on your industry, role and location.
A note for Washington businesses
Washington has no state income tax, so the S corp decision here is mostly about federal payroll taxes. B&O tax is charged on gross receipts no matter which structure you choose, so an S corp election won’t change it.
When does an S corp make sense?
There’s no single cutoff, but many business owners find an S corp isn’t worth it until profit is steady and comfortably above what a reasonable salary for their role would be. If your profit swings a lot year to year, or you’re just starting out, a regular LLC is often the simpler choice.
The election also has deadlines. To take effect for the current year, Form 2553 generally has to be filed within 2 months and 15 days of the start of the tax year (March 15 for most calendar-year businesses), though late-election relief is sometimes available.
Talk to a tax professional before you decide
This article is for general educational purposes only and is not tax, legal or financial advice. B2B Solutions does not provide tax advice. The example above is simplified: it leaves out income tax, deductions, credits, state rules and many other factors that affect your actual result. Tax laws and rates change, and the right structure depends on your income, goals and situation.
Before forming an entity or electing S corp status, talk with a CPA, enrolled agent or tax attorney. They can run the numbers on your actual figures, help you set a defensible salary, and make sure your elections are filed correctly and on time.
How B2B Solutions can help
Once you and your tax professional decide on a structure, we handle the work that comes with it:
- LLC formation and registered agent services (see our guide on how to form an LLC in Washington State)
- Payroll setup and administration, including owner-employee payroll for S corps (Washington and Iowa)
- Monthly bookkeeping that keeps salary, distributions and business expenses cleanly separated, so year-end is easy for your tax preparer
Get in touch or call us at 360-529-2672 to get started.