One of the most common questions business owners ask is whether they should structure their company as an LLC or elect S-Corp status. The answer depends on more factors than most online articles let on — and in 2026, the landscape has shifted again thanks to the One Big Beautiful Bill Act (OBBBA).
This isn't a decision you make once and forget about. Your entity structure affects how much you pay in self-employment taxes, how much of your income qualifies for the Qualified Business Income deduction, and how much administrative overhead you take on every year. Let's walk through what actually matters.
The Basics
An LLC is a legal entity formed at the state level. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. The key thing to understand is that all of the net income from the business flows through to the owner's personal return — and all of it is subject to self-employment (SE) tax.
Self-employment tax has three components. First, the Social Security portion at 12.4%, which applies to earnings up to the 2026 wage base of $184,500. Second, the Medicare portion at 2.9%, which has no cap. And third, the Additional Medicare Tax of 0.9% on earnings above $200,000 for single filers or $250,000 for married filing jointly. Combined, that's a significant tax burden on top of your income taxes.
An S-Corp is not a separate type of legal entity — it's a tax election. You can form an LLC and then elect to be taxed as an S-Corporation by filing Form 2553 with the IRS. The critical difference is that with an S-Corp, you pay yourself a “reasonable salary,” and only that salary is subject to FICA payroll taxes. Any remaining profit distributed to you as a shareholder is not subject to self-employment tax.
That distinction — salary versus distribution — is where the potential tax savings come from. But it also introduces complexity, which is why this isn't a slam dunk for every business.
When the S-Corp Election Tends to Make Sense
As a general rule of thumb, the S-Corp election starts to become attractive when your business net income consistently exceeds $60,000 to $80,000 per year. Below that range, the administrative costs of running payroll, filing a separate S-Corp return (Form 1120-S), and maintaining corporate formalities tend to eat into or eliminate the tax savings.
Here's a simplified example. Say your business earns $200,000 in net income. As a default LLC (sole proprietorship), the entire $200,000 is subject to self-employment tax. Under an S-Corp election, you might pay yourself a reasonable salary of $100,000 and take the remaining $100,000 as a shareholder distribution. Only the $100,000 salary is subject to FICA taxes. The distribution avoids the 12.4% Social Security tax and the 2.9% Medicare tax — a savings of roughly $15,300.
The key phrase in that example is “reasonable salary.” The IRS requires that S-Corp shareholders who perform services for the business pay themselves a salary that's commensurate with what someone in a similar role would earn. Setting your salary unreasonably low to maximize the distribution is one of the most common audit triggers for S-Corps. The IRS has reclassified distributions as wages in numerous cases, and when that happens, you owe back payroll taxes plus penalties and interest.
So the savings are real, but they have to be done right. That means running payroll properly, paying quarterly employment taxes, and working with a CPA or financial planner who understands the rules.
The Section 199A (QBI) Deduction Under OBBBA
The Qualified Business Income deduction was originally enacted by the Tax Cuts and Jobs Act (TCJA) in 2017 and was set to expire at the end of 2025. The One Big Beautiful Bill Act permanently extended it, with some modifications that took effect in 2026.
Section 199A allows eligible business owners to deduct up to 20% of their qualified business income, with a minimum deduction of $400 in 2026. For pass-through entities like LLCs and S-Corps, this can be a significant tax benefit. But the mechanics of the deduction interact with entity structure in important ways.
For taxpayers above the income phaseout thresholds — $201,750 for single filers and $403,500 for married filing jointly in 2026 — the QBI deduction becomes limited by a formula that considers W-2 wages paid by the business and the unadjusted basis of qualified property. This is where the S-Corp election can actually support a larger QBI deduction. An S-Corp that pays meaningful W-2 wages to its owner-shareholders creates the wage base needed to maximize the deduction under this formula. A sole proprietorship, by contrast, has no W-2 wages to lean on.
There are also Specified Service Trade or Business (SSTB) rules to consider. If your business falls into an SSTB category — think law, medicine, accounting, consulting, financial services, and similar fields — the QBI deduction is fully eliminated once taxable income exceeds $276,750 for single filers or $553,500 for married filing jointly.
One more item worth noting: Pass-Through Entity Taxes (PTETs) remain available. During the drafting of the OBBBA, the House version proposed limiting state PTET deductions, but that provision was removed from the final law. So if your state offers a PTET election — and Texas does not impose a traditional income tax, but this matters if you operate in states that do — it continues to be a viable strategy for working around the $10,000 SALT cap.
When Staying as an LLC May Make Sense
Not every business benefits from the S-Corp election. If you are in the early stages of your business and your income is still unpredictable, the added cost and complexity of an S-Corp may not be worth it. Running payroll, filing the separate corporate return, and keeping up with employment tax deposits all take time and money.
If your business is generating losses — which is common in the first few years — there's no self-employment tax savings to capture, so the S-Corp structure adds overhead without a benefit.
There are also structural restrictions that come with the S-Corp election. An S-Corp can have only one class of stock, is limited to 100 shareholders, and shareholders must be U.S. individuals (or certain trusts and estates). If you plan to bring on investors, issue different equity classes, or have foreign owners, the S-Corp structure won't work. A standard LLC taxed as a partnership or even a C-Corporation may be a better fit in those cases.
C-Corporations: A Quick Overview
While this article focuses on the LLC-vs-S-Corp question, it would be incomplete without mentioning C-Corporations. A C-Corp pays a flat 21% corporate income tax, and when profits are distributed to shareholders as dividends, those dividends are taxed again at the individual level — the so-called “double taxation” issue. For most small business owners, this makes the C-Corp less attractive.
However, the OBBBA introduced some notable changes for C-Corporations. The Qualified Small Business Stock (QSBS) exclusion under Section 1202 now uses a graduated structure for stock acquired after July 4, 2025. Previously, qualifying shareholders could exclude 100% of the gain on QSBS held for at least five years. Under the new rules, the exclusion is 50% for stock held three to four years, 75% for stock held four to five years, and 100% for stock held five or more years. If you are building a startup with venture-scale ambitions, these timelines matter.
The OBBBA also permanently restored 100% bonus depreciation for property placed in service after January 19, 2025 — a benefit that had been phasing down under prior law. And the Section 179 expensing limit was increased to $2.5 million. For capital-intensive businesses, whether structured as C-Corps or pass-throughs, these provisions create meaningful planning opportunities.
Not a Set-It-and-Forget-It Decision
Your entity structure should be revisited at least once a year. Businesses evolve. Income levels change. Tax laws change — and the OBBBA is proof that big shifts can happen quickly.
What made sense when you were earning $70,000 may no longer make sense at $250,000. A business that started as a solo operation may now have employees, partners, or plans to raise outside capital. Each of these changes can alter the calculus.
The worst thing you can do is make an entity election and never look at it again. The second-worst thing is to make the decision based on a single article, a friend's experience, or a TikTok video. Entity structure is one piece of a much larger financial picture that includes your tax situation, retirement savings strategy, cash flow, liability exposure, and long-term goals.
If you're unsure where you stand, this is exactly the kind of question a fee-only financial planner can help you work through — not to sell you a product, but to help you understand the trade-offs and make a decision that fits your situation today, with a plan to revisit it as things change.