S-Corp vs LLC: Which Business Structure Is Right for Your Growing Business?

Have you ever found yourself scrolling through TikTok and wondering if that "business guru" who just declared "Every business owner NEEDS an S-Corp!" actually knows what they're talking about? Or maybe you've seen the complete opposite advice: "LLCs are always better!"

So which business structure is actually right for your situation?

Unfortunately, there’s no one-size-fits-all universal answer, and costly mistakes can happen when you follow generic advice from social media. Your business structure impacts your taxes, liability, and future flexibility, so it's worth getting it right from the start.

In this article, we’ll give you a clear framework for choosing between an LLC and S-Corp based on your actual business circumstances, not viral social media advice.

Here's what we'll cover:

• The overlooked fundamentals (like liability protection)
• Real tax differences that affect your bottom line
• How your state laws can completely flip the equation
• Revenue thresholds that matter
• When neither LLC nor S-Corp is the best fit
• The questions that help you make the right choice

What You Need to Know Before Choosing Any Business Structure

Before we dive into the LLC vs S-Corp debate, let's address something that often gets overlooked in all the tax talk: Liability protection should be your top priority, not tax savings.

Without the right structure in place, your personal assets (like your home and savings) could be on the line.

LLCs and S-Corps both create a legal separation between you and your business, helping shield you from personal liability. But this protection only works if you follow certain rules:

• Keep business and personal finances separate
• Maintain required legal documents and compliance
• Carry appropriate insurance

Entity formation is the first step in protecting yourself. Tax savings come after that.

When You Actually Need a Business Entity

Contrary to what you may believe, you don't need to form a business entity the moment you make your first sale. Many successful businesses started as sole proprietorships, and that's usually okay for a while.

However, you should consider forming an entity when you:

• Hire employees
• Use vehicles or equipment in your business
• Operate from a physical location
• Carry inventory or offer services with liability risk
• Start generating meaningful profit (generally $100,000+)

If you’re still a solopreneur working from home with minimal risk, you might be fine starting out as a sole proprietor. But don’t wait too long to revisit your setup as your business grows.

Why Your Goals and Timeline Matter

The biggest mistake we see business owners make is choosing a structure based solely on their current situation without considering where they want to be in the future.

Ask yourself:

• Will I bring on partners or investors?
• Do I want to sell the business someday?
• Will I expand to multiple locations or services?
• Do I need to reinvest profits or take most of the money out for personal expenses?

Your business structure should work for where you are today, but it should also support where you're headed.

The Real Tax Differences Between LLCs and S-Corps

Now let's get to what most business owners really care about: taxes. Here's how the two structures compare.

How LLCs Are Taxed

By default, a single-member LLC is taxed like a sole proprietorship. That means:

• All business income flows through to your personal tax return
• You pay both income tax and self-employment tax (15.3% for 2025) on the entire profit.

Example:
If your LLC earns $100,000 in profit, you'll owe roughly $15,300 in self-employment taxes, plus regular income tax.

Straightforward? Yes. Tax-efficient? Not necessarily.

How S-Corps Can Save You Money

When you elect S-Corp status, you become both an owner and an employee of your business. This creates a key tax-saving opportunity:

• You pay yourself a “reasonable salary” (subject to payroll taxes)
• Any remaining profit is paid as a distribution (not subject to self-employment tax)

Example:
Earn $100,000 in profit. Pay yourself a $60,000 salary. The remaining $40,000 is a distribution. You pay payroll tax only on the $60,000, potentially saving approximately $3,000-$4,000 in self-employment taxes.

Why the IRS Cares About Your "Reasonable" Salary

Before you get too excited about minimizing your salary, you need to understand that you can't just pay yourself $1 and call the rest a distribution. The IRS requires S-Corp owners who work in the business to pay themselves "reasonable compensation" based on:

• Industry standards
• Your experience and role
• Business profitability and size
• Time spent working in the business

In the early years of your business, you may be able to justify a lower salary. But as your business grows and becomes consistently profitable, so should your compensation.

Why Your State Location Changes Everything

Here's where things get complicated, and why generic social media advice can be so dangerous: Your state tax laws can completely change which structure is better for you.

Tennessee's Unique S-Corp Challenge

In most states, S-Corps provide clear tax advantages. But Tennessee is different.

Tennessee treats S-Corps essentially like C-Corps for state tax purposes, which means your S-Corp will pay a 6.5% excise tax on its income. Meanwhile, LLCs that are subject to self-employment tax aren't subject to Tennessee's excise tax.

Here's the math:
The Social Security tax savings from an S-Corp election might save you about 15.3% on the portion of income above your reasonable salary. But if you're paying 6.5% state tax on all the business income, much of that federal savings gets eaten up by state taxes.

It gets even more interesting when you consider that Social Security tax caps out at $176,100 (for 2025). If your business income exceeds that threshold, you'd only pay 2.9% Medicare tax on the excess as an LLC, but you'd still pay the full 6.5% Tennessee excise tax as an S-Corp.

The result? In Tennessee, LLCs often make more sense than S-Corps, especially for higher-income businesses.

State-Specific Considerations

Tennessee isn't the only state with these types of rules. Some states:

• Don't recognize S-Corp elections at all
• Impose extra franchise or entity-level taxes
• Have different rules for professional service businesses

What works in one state might be costly in another.

When an S-Corp Starts Making Sense

While there's no hard rule about when to elect S-Corp status, many tax professionals use $100,000 in business income as a rough guideline for when the tax savings typically justify the additional complexity and costs.

Here's a rough framework for thinking about S-Corp elections:

• Under $75,000: Probably not worth it unless you have specific circumstances
• $75,000-$100,000: Worth considering, especially if you have steady and predictable income
• Over $100,000: Likely beneficial in most states (unless state laws complicate things...like in Tennessee)
• Over $200,000: Almost certainly beneficial unless state law creates issues

Remember, these are guidelines, not rules. Your specific situation might call for different thresholds.

Special Note for Solopreneurs:
If you're the only person in your business, it's tough to justify a large salary gap. S-Corps tend to make more sense once you have employees, multiple profit streams, or profits that go beyond just your personal labor.

When Neither LLC nor S-Corp Is the Right Answer

While LLCs and S-Corps work for most small businesses, sometimes the best move is a C-Corp. This is especially true if you’re building a high-growth company you plan to sell.

If you're building a business with the intention of selling it for a significant gain, C-Corp status combined with qualified small business stock (Section 1202) can provide enormous tax benefits.

Here's how it works:
If you hold stock in a qualified small business for at least five years, you can exclude up to $10 million in gain (or 10 times your basis, whichever is greater) from federal income taxes when you sell.

This benefit is only available for C-Corp stock, not LLC interests or S-Corp stock.

So what’s the catch?
You need to plan for this from the beginning. The five-year holding period starts when the stock is issued, and there are strict rules about what qualifies as a "qualified small business."

When C-Corp Status Doesn't Fit

Not every business can take advantage of Section 1202. Professional service businesses like accounting firms, law practices, and medical practices are specifically excluded.

But for technology companies, manufacturing businesses, restaurants, and many other industries, the potential tax savings can be enormous. We're talking about potentially millions of dollars in tax savings on a business sale.

When C-Corp Status Works

C-Corp elections make the most sense when:

• You're building a business to sell (not pass to family)
• You expect significant growth in value
• You can commit to holding the business for at least five years
• Your industry qualifies for Section 1202 treatment
• You can reinvest profits instead of pulling them out for personal use

The downside?
C-Corps face "double taxation." In other words, the corporation pays tax on profits, and you pay tax again when profits are distributed as dividends. But if you're reinvesting profits for growth and planning for a tax-advantaged sale, this might not be a concern.

The Cost of Getting Your Business Structure Wrong

What happens if you realize you chose the wrong entity structure? Unfortunately, fixing business structure mistakes can be expensive and complicated.

• If you need to change from an LLC to an S-Corp, the process is usually straightforward. You can often just elect S-Corp tax treatment without changing your legal entity structure.
• If you need to change from an S-Corp to an LLC, you typically have to liquidate the S-Corp, which is treated as a sale of all business assets. This creates a taxable event, and you'll owe taxes as if you sold the business to yourself.

Real Estate Ownership Complications

One of the most expensive mistakes we see is business owners putting real estate into an S-Corp. 

Here's why this creates problems:

• Real estate doesn't generate "reasonable compensation," so it's hard to justify taking a salary from rental income
• When you want to take the real estate out of the S-Corp (which you almost always will), it creates a taxable liquidation event
• You lose the ability to do tax-deferred exchanges under Section 1031

Once real estate is stuck inside an S-Corp, the fix is costly.

When It Makes Sense to Start Over

Sometimes restructuring is worth the short-term pain. For example, we’ve helped clients intentionally “break” an S-Corp election to convert to a C-Corp when preparing for a future sale.

The key is running the numbers: If the long-term benefits outweigh the one-time costs, restructuring may still be the smarter move.

How to Choose the Right Entity Structure for Your Business

So, how do you know which structure is right for you? Start by asking the right questions in three areas: your current situation, your future goals, and your tolerance for complexity.

1. Your current situation

• What's my current annual business income?
• Do I have employees?
• What state is my business located in?
• Do I need liability protection?
• How much money do I need to take out of the business personally?

2. Your future goals

• Where do I see my business in 3-5 years?
• Am I planning to bring in partners or investors?
• Do I want to sell the business someday?
• Will I need to reinvest profits for growth?

3. Your risk and complexity tolerance

• Am I comfortable with more paperwork and compliance?
• Can I afford professional payroll and tax preparation services?
• Do I have the discipline to maintain corporate formalities?

Why Professional Guidance Matters

Business structure decisions are too important and too complex for one-size-fits-all calculators. You need advice that considers your state's laws, your income, your industry, and your goals.

The right structure is the one that supports where you're going, not just where you are today. Planning ahead is far less costly than fixing mistakes later.

Making the Right Entity Choice for Your Business

If there's one thing we want you to take away from this discussion, it's this: There's no single "best" business structure.

Business structure decisions depend entirely on your unique situation. Anyone who says every business should be an LLC or every business should be an S-Corp is oversimplifying.

At Patrick Accounting, we help business owners make these decisions every day. We know that what works for a restaurant in Tennessee might not work for a consulting firm in Texas. That's why we take the time to understand your business, your goals, and your circumstances before making recommendations.

Ready to find the right business structure for your business? Let's have a conversation. Because when it comes to something this important, you deserve advice tailored to you, not trending social media soundbites.

For more information about the tax advantages of each structure, check out our article: "S-Corp vs. LLC: Which Offers Better Tax Advantages for Small Businesses?"