S-corp vs. LLC: what’s the difference, and which should you choose?

Of all the questions we get from new owners, “should I be an LLC or an S-corp?” is the most common — and the most misunderstood. The honest answer starts with a clarification: they are not really two things on the same menu. An LLC is a legal structure. An S-corp is a tax election. You can be both at once, and for a lot of profitable Colorado businesses, that is exactly the right setup.

They answer two different questions

An LLC — a limited liability company — is about legal protection and how your business is organized. It separates your personal assets from the business’s liabilities, and it is simple to form and maintain. By default, a single-owner LLC is taxed like a sole proprietor and a multi-owner LLC like a partnership.

An S-corp is not a way to form a business at all — it is an election you make with the IRS about how an existing entity is taxed. An LLC (or a corporation) can elect to be taxed as an S-corp while staying an LLC legally. So the real question is rarely “LLC or S-corp?” It is “should my LLC elect S-corp taxation?”

Why the election can save money

The savings come down to self-employment tax. As a plain LLC, essentially all of your profit is hit with self-employment tax — Social Security and Medicare — at about 15.3%. Elect S-corp taxation and you split your pay into two buckets: a reasonable salary that owes payroll tax, and distributions of the remaining profit that do not. You still owe income tax on all of it, but you carve a slice of profit out of that 15.3% bite. (We walk through the mechanics in detail in our guide to paying yourself.)

The trade-off: simplicity vs. savings

Here is the honest comparison, because the election is not free:

• A plain LLC is simpler and cheaper to run — no payroll for yourself, one tax return, light bookkeeping — but every dollar of profit owes self-employment tax.
• An LLC with an S-corp election can save thousands in self-employment tax once you are profitable enough — but it adds payroll, a separate business return, a reasonable-salary requirement, and more bookkeeping.

So the decision is a balance: are the tax savings big enough to outweigh the added cost and admin? That depends almost entirely on your profit.

Where the line usually falls

As a rough rule, the math starts working in your favor once the business is reliably netting somewhere around $75,000–$80,000 after you have paid yourself a reasonable salary. Below that, the savings on a smaller pool of distributions often will not clear the added cost of payroll and a second return. Above it, the gap widens quickly. It is genuinely a “run your specific numbers” call — and we go deeper on the break-even, plus the Colorado-specific angle, in our piece on whether an S-corp is worth it for a Colorado business owner.

Think of it as a two-step decision: form the LLC for legal protection now, and add the S-corp election later, once your profit is high enough that the tax savings clearly beat the extra paperwork.

The one rule that keeps it honest

If you do elect S-corp taxation, you cannot pay yourself a token salary to dodge payroll tax. The IRS requires “reasonable compensation” — a salary that reflects what the job is actually worth — and underpaying it is one of the most reliably audited moves in small-business tax. The savings are real, but they live in the gap between a defensible salary and your profit, not in pretending you work for free.

The bottom line

You are almost never choosing between an LLC and an S-corp — you are deciding whether and when your LLC should elect to be taxed as one. Form the entity for protection, then make the tax election when your profit justifies it. If you want to know whether you have crossed that line, we will run it against your actual numbers and tell you honestly.

This is general information for business owners, not individual legal or tax advice. The right structure depends on your specific situation — talk it through with a CPA before you elect.