LLC or S Corp? The Tax Decision New Business Owners Need to Make

We want to help you make more informed decisions. Some links to products on this page will take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
Best pricing for simple filings
ZenBusiness
From $0, plus government filing fees
Jump to details
Good for Speedy Checkout
Swyft Filings
From $49, plus government filing fees
Jump to details
Best for business and personal filings in one place
LegalZoom
From $79, plus government filing fees
Jump to details
Best for step-by-step guidance
Northwest Registered Agent
From $100, plus government filing fees
Jump to details

If you’ve gone through the joys and pains of starting a business—and you’re actually making money at it—you want to keep as much of that money as you can.

That’s why every new business owner needs to confront the decision of how and when to incorporate a business and classify its tax status.

There have been record numbers of new business filings in the United States since the arrival of COVID-19. The entrepreneur behind each of these applications made an important decision that you also need to make: Should your business be taxed as a Limited Liability Corporation (LLC), an S corporation, or something else? While it’s important to know the basics, an online tool can help you make your filing efforts much easier.

Best pricing for simple filings
ZenBusiness
ZenBusiness
Best pricing for simple filings
ZenBusiness
Learn More externa link icon
  • Price:
    From $0, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

When you’ve helped launch over 300,000 businesses, you know you’re doing something right.

ZenBusiness is a Public Benefit Corporation (PBC), a type of corporation that generates services that contribute to the public good, and agrees to operate sustainably and responsibly. The Austin-based company is also a unicorn, last valued at $1.7 billion in November 2021. ZenBusiness’ website includes recommended resources for women and BIPOC business owners, along with clear statements on diversity, equity, and inclusion. ZenBusiness also has an “excellent” rating on TrustPilot, based on the average of the over 10,000 reviews it has received from customers.

Most notably, however, the company’s Starter package will let you file the essentials for free, plus the cost of state filing fees.

Starter package

  • Standard filing service: ZenBusiness team will file and return your completed documents with the state.
  • Standard filing speed: ZenBusiness will process and return the completed state documents, based on when the order is received, as well as the backlog the state is working through at that time. This can range from a few days to a few weeks, depending on the state.
  • Expense and deduction tracking: Each Starter package includes a free Money Essential tool that allows customers to easily track expenses and tax deductions for improved accounting and easier tax return preparation.
Good for Speedy Checkout
Swyft Filings
Swyft Filings
Good for Speedy Checkout
Swyft Filings
Learn More externa link icon
  • Price:
    From $49, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Swyft Filings has helped over 250,000 business owners in all 50 states with filings since its inception in 2015. Founded by a lawyer, the company’s services assist with LLC formation, DBAs, registered agents, and S corporation elections. They also work with new and established nonprofits. Continued support or professional guidance is available after you file if you want a helping hand.

The company is focused on business filings only, and does not offer personal legal counseling. Swyft Filings has a 4.8/5 rating from over 5,300 reviews on Trustpilot, a reviews aggregator service. The company has formation-specific FAQ sections, live chat, and a toll-free phone number you can call if you want to speak to someone personally. As its name suggests, Swyft Filings’ website is lightning fast and easy to navigate.

Best for business and personal filings in one place
LegalZoom
LegalZoom
Best for business and personal filings in one place
LegalZoom
Learn More externa link icon
  • Price:
    From $79, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

LegalZoom helps you set up an LLC in your state quickly, easily, and entirely online. An LLC is needed for important business functions, such as opening a business bank account. Different states have different business formation requirements; LegalZoom customizes the process for you based on what state you live in, and the company helped consumers form 447,000 businesses in 2021, according to a press release.

Mistakes can be made when trying to form an LLC by yourself, and business formation professionals can be expensive. If you want a cost-effective and convenient way to create your LLC (and keep more of the money you make from your side hustle or business when tax time rolls around), LegalZoom is a great option.

Best for step-by-step guidance
Northwest Registered Agent
Northwest Registered Agent
Best for step-by-step guidance
Northwest Registered Agent
Learn More externa link icon
  • Price:
    From $100, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Northwest Registered Agent became popular for its $39 LLC formation service, which it offered in its early years. It’s also well known for its commitment to customer service; the company’s tagline is “We’re just not annoying”, and the website manifesto outlines the family-owned business’ commitment to communication and transparency. Northwest Registered Agent’s website makes checkout very simple, and it automatically directs you to state-specific filing details, making it easy to customize your order.

A handy feature of Northwest Registered Agent’s checkout process is that you don’t totally need to know everything you might need or want from a filings perspective when you sign up. The guided checkout process explains filings as you go, allowing you to customize your order and ensure you’ve set yourself up for success.

The business formation and tax lingo – Sole proprietorship, Partnership, Limited Liability Corporation, S corporation, C corporation, and so on – can quickly get overwhelming. But it’s a choice you need to make—and in many cases, you can get the benefits of both.

Here’s what to know. 

LLC or S Corp: Why Decide Now?

There are three main reasons to consider incorporation sooner rather than later.

You’ll Save Money — a Lot of Money. The Internal Revenue Service makes business ownership an attractive option. When you’re incorporated, there are ample opportunities to write off expenses and investments you make in the business, which reduces your overall taxable income. You won’t get these same benefits when you’re self-funding with no paper trail.

You’ll Get Protections. If you incorporate as a business entity, and your business is sued or finds itself in debt later on down the line, your business will be liable. Your personal assets, however, will be not liable; if your business goes under, you’ll keep the house, car, and savings account.

We don’t start a business expecting to go bankrupt, but the reality is that it happens: 50% of businesses fail within the first five years. The pandemic also showed us that tides can turn unexpectedly in commerce; it’s possible that forces outside your control could lead to reduction or termination of your business.

You Might Be More Motivated. When you incorporate your business, you’re going to take it more seriously, and your prospective clients will too. Business owners who expect to be around for the long game take the time to incorporate because it projects professionalism and quality to customers. You’ve already come this far; do yourself a favor and officially form your business to give yourself peace of mind. 

Pro Tip

Incorporating your new venture can save you money and project professionalism to your customers.

LLC vs. S Corporation Tax Classification: What You Should Know

Your business formation might be different than your tax classification, notes Meg K. Wheeler, a Certified Professional Accountant and business money coach.

“An S Corp isn’t actually a legal entity – it’s a tax status that an existing LLC or corporation can elect to be taxed as,” she says. “From a tax perspective, there are big differences between an LLC and a C corporation.”

“An LLC is a pass-through entity, meaning that its profits or losses pass through to its owners and are then reported (and taxed) on their personal income tax returns. A corporation, on the other hand, is subject to double taxation – it’s taxed on its profits at the corporate level and its shareholders are taxed on those profits when they receive distributions. A corporation can make sense if you’re thinking of bringing on investors and want the convenience of selling shares. Both LLCs and corporations can elect to be classified as S Corps for tax purposes.”

Limited Liability Corporation (LLC)

A Limited Liability Corporation, or LLC, is a “pass-through entity,” says Wheeler. 

It can have multiple members, and should if you have business partners. If you’re the only owner, however, you can incorporate as a single-member LLC, which allows you to file the business’ taxes along with your own personal taxes in one return. In a single-member LLC, your tax bill is determined by your profits.

Choosing an LLC as your tax classification means more flexibility and less paperwork than an S Corp. The risk comes when entrepreneurs try to treat their LLC like their own personal bank account. This can become a slippery slope, says Kristen Roberts, an intellectual property attorney and founder of Trestle Law.

“Unlike corporations, LLCs have no corporate formalities,” says Roberts. “So if you’re a single-member (people who own interests in LLCs are called members, not shareholders), the risk that you will treat that LLC the same as if you weren’t incorporated at all goes way up, which can entirely negate the legal protections provided by incorporating.”

It’s also important to determine whether your state has any additional restrictions for LLC formation before you go through the process.

“Be mindful of your industry. Some states (like California) don’t allow certain businesses to form LLCs,” notes Roberts. “These are typically licensed professionals, but it’s a good idea to know whether you are legally allowed to set up an LLC for your business before doing so.”

S Corporation

In contrast, choosing to form as a corporation demands a bit more structure. You’re required to maintain a board of directors and have annual corporate meetings, and owners of the company are considered shareholders. Corporations also require that you pay yourself a salary if you’re actively working in the business, which Roberts says is great for ensuring you actually pay yourself.

“While the corporate formalities such as a board of directors, annual corporate meetings, bylaws, etc. might seem tricky at first, they become very easy to navigate in a short period of time,” she says. “It also gets you accustomed to paying yourself regularly, as corporations have a salary requirement for shareholders who are also employees.”

The salary you pay yourself within your corporation also needs to be “reasonable compensation.” Wheeler notes that the IRS watches these numbers like a hawk, and that guidance from a tax professional is critical at this stage.

“The trick is how to calculate reasonable compensation, and for this you should absolutely work with a qualified tax expert as the IRS loves to crack down on underpaid S Corp owners,” she says. “If the IRS decides you haven’t paid yourself enough reasonable compensation, they can recategorize some or all of your profits as wages and you’ll be subject to back payroll taxes, penalties, and interest.”

The Best of Both Worlds: Having Your LLC Be Taxed as an S Corp

If you’re still feeling indecisive, this might help: You can elect to have your LLC taxed as an S corporation. This was the approach I personally used in my business; I wanted the simplicity of an LLC, but the tax savings that come with an S corp classification. 

Roberts agrees. “Setting up as an LLC then electing to be taxed as an S corp can sometimes be the best of both worlds. It combines the ease of owning a flexible creature of contract – an LLC – with the tax savings of a corporation. When done right, the savings can be huge, particularly when it comes to self-employment tax.”

Wheeler notes that this election depends on your numbers and your profitability.

“Ultimately, it comes down to whether you have sufficient profits to pay yourself reasonable compensation plus some,” she says. “Otherwise, you won’t get to take advantage of the S Corp tax benefits. What’s [considered] reasonable compensation depends on your industry, the work you do, how experienced you are, etc. and you also need to consider the state you’re located in. California, for example, taxes S Corps at a higher rate than LLCs. Bottom line – make sure you’re working with a tax advisor who understands S corps and start the conversation early.”

If you choose this option, be prepared for some extra paperwork.

“Don’t forget to consider the additional administrative burden – the S Corp election means taking extra steps (like filing a separate business return and setting up an accountable plan to handle deductions such as your home office) and the tax savings may not be worth the extra burden in every case.”

From appearing more professional to keeping more of those hard-earned dollars in your pocket, incorporating your hustle is a smart move. Check your state requirements and work with a licensed professional or a trusted online service to get started today.

NextAdvisor’s Recommendedations

Best pricing for simple filings
ZenBusiness
From $0, plus government filing fees
Jump to details
Good for Speedy Checkout
Swyft Filings
From $49, plus government filing fees
Jump to details
Best for business and personal filings in one place
LegalZoom
From $79, plus government filing fees
Jump to details
Best for step-by-step guidance
Northwest Registered Agent
From $100, plus government filing fees
Jump to details
Best pricing for simple filings
ZenBusiness
ZenBusiness
Best pricing for simple filings
ZenBusiness
Learn More externa link icon
  • Price:
    From $0, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

When you’ve helped launch over 300,000 businesses, you know you’re doing something right.

ZenBusiness is a Public Benefit Corporation (PBC), a type of corporation that generates services that contribute to the public good, and agrees to operate sustainably and responsibly. The Austin-based company is also a unicorn, last valued at $1.7 billion in November 2021. ZenBusiness’ website includes recommended resources for women and BIPOC business owners, along with clear statements on diversity, equity, and inclusion. ZenBusiness also has an “excellent” rating on TrustPilot, based on the average of the over 10,000 reviews it has received from customers.

Most notably, however, the company’s Starter package will let you file the essentials for free, plus the cost of state filing fees.

Starter package

  • Standard filing service: ZenBusiness team will file and return your completed documents with the state.
  • Standard filing speed: ZenBusiness will process and return the completed state documents, based on when the order is received, as well as the backlog the state is working through at that time. This can range from a few days to a few weeks, depending on the state.
  • Expense and deduction tracking: Each Starter package includes a free Money Essential tool that allows customers to easily track expenses and tax deductions for improved accounting and easier tax return preparation.
Good for Speedy Checkout
Swyft Filings
Swyft Filings
Good for Speedy Checkout
Swyft Filings
Learn More externa link icon
  • Price:
    From $49, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Swyft Filings has helped over 250,000 business owners in all 50 states with filings since its inception in 2015. Founded by a lawyer, the company’s services assist with LLC formation, DBAs, registered agents, and S corporation elections. They also work with new and established nonprofits. Continued support or professional guidance is available after you file if you want a helping hand.

The company is focused on business filings only, and does not offer personal legal counseling. Swyft Filings has a 4.8/5 rating from over 5,300 reviews on Trustpilot, a reviews aggregator service. The company has formation-specific FAQ sections, live chat, and a toll-free phone number you can call if you want to speak to someone personally. As its name suggests, Swyft Filings’ website is lightning fast and easy to navigate.

Best for business and personal filings in one place
LegalZoom
LegalZoom
Best for business and personal filings in one place
LegalZoom
Learn More externa link icon
  • Price:
    From $79, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

LegalZoom helps you set up an LLC in your state quickly, easily, and entirely online. An LLC is needed for important business functions, such as opening a business bank account. Different states have different business formation requirements; LegalZoom customizes the process for you based on what state you live in, and the company helped consumers form 447,000 businesses in 2021, according to a press release.

Mistakes can be made when trying to form an LLC by yourself, and business formation professionals can be expensive. If you want a cost-effective and convenient way to create your LLC (and keep more of the money you make from your side hustle or business when tax time rolls around), LegalZoom is a great option.

Best for step-by-step guidance
Northwest Registered Agent
Northwest Registered Agent
Best for step-by-step guidance
Northwest Registered Agent
Learn More externa link icon
  • Price:
    From $100, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Northwest Registered Agent became popular for its $39 LLC formation service, which it offered in its early years. It’s also well known for its commitment to customer service; the company’s tagline is “We’re just not annoying”, and the website manifesto outlines the family-owned business’ commitment to communication and transparency. Northwest Registered Agent’s website makes checkout very simple, and it automatically directs you to state-specific filing details, making it easy to customize your order.

A handy feature of Northwest Registered Agent’s checkout process is that you don’t totally need to know everything you might need or want from a filings perspective when you sign up. The guided checkout process explains filings as you go, allowing you to customize your order and ensure you’ve set yourself up for success.