How to Choose Between LLC and S-Corp in 2026

The entity question is the first real fork in the road for every new owner — and most founders get it wrong by overthinking it. Here is the actual decision tree we use with our clients in 2026.

Start with the LLC default

An LLC is the simplest legal structure that gives you personal liability protection. You file Articles of Organization with your state, you get an EIN from the IRS, and you operate. There is no separate corporate tax return. The income flows through to your personal return on Schedule C (single-member) or Form 1065 (multi-member).

For most owners under $50,000 in net profit, the LLC default wins on every dimension that matters: filing cost, ongoing paperwork, audit risk, and flexibility.

When the S-Corp election starts to pay

Once you cross roughly $80,000 in net profit, the math on an S-Corp election changes. Here is why: as an LLC, every dollar of profit is subject to self-employment tax — 15.3% on the first $168,600 of earnings in 2026. As an S-Corp, you pay yourself a "reasonable salary" subject to payroll tax, and the remaining profit comes out as a distribution that is NOT subject to self-employment tax.

On $120,000 of net profit, splitting it as $70,000 salary plus $50,000 distribution saves you about $7,650 a year. That is real money — but it costs you about $1,500 to $2,500 in payroll processing, an annual S-Corp tax return, and your time.

The trap most owners fall into

Filing the S-Corp election (Form 2553) without actually running payroll is the most common mistake we see. The IRS expects shareholders who work in the business to take a reasonable salary. "I will just take distributions" is not a valid strategy — it is a reclassification audit waiting to happen.

If you are not ready to set up actual payroll through Gusto, Rippling, or QuickBooks, do not file the S-Corp election yet. Wait until your profit and your operations can support it.