When starting or growing a small business, one of the most important decisions you’ll make is how to structure your business entity. For many business owners, that choice comes down to two popular options: the Limited Liability Company (LLC) and the S Corporation (S Corp). Each has unique features, tax implications, and administrative requirements that can significantly impact your operations and long-term goals.
In this post, we’ll explore the differences between LLCs and S Corps and highlight how Haven Financial Planning can help you navigate the best path for your business.
What is an LLC?
A Limited Liability Company (LLC) is a flexible business structure that combines elements of sole proprietorships, partnerships, and corporations. It offers:
- Limited liability protection for owners (called “members”)
- Flexible taxation options (by default taxed as a sole proprietorship or partnership)
- Minimal administrative requirements compared to corporations
LLCs are popular among freelancers, consultants, family businesses, and startups because they are easy to form and maintain.
What is an S Corporation?
An S Corporation is not a separate entity type like an LLC—rather, it is a tax classification that certain corporations or LLCs can elect with the IRS. The S Corp election allows profits (and some losses) to pass directly to the owner’s personal tax return, avoiding double taxation.
Key features of S Corps include:
- Pass-through taxation (like an LLC)
- Potential tax savings on self-employment taxes
- Stricter ownership rules (e.g., only U.S. citizens/residents, max 100 shareholders)
- Required payroll for shareholder-employees
Key Differences Between LLCs and S Corps
| Feature | LLC | S Corporation |
| Formation | State-level registration | Starts as a corporation or LLC + IRS election |
| Ownership Rules | No restrictions on members | Max 100 shareholders; U.S. citizens/residents only |
| Taxation | Default pass-through; flexible | Pass-through with payroll/self-employment tax split |
| Self-Employment Taxes | Members pay full SE tax on income | Owner-employees pay on salary only, not distributions |
| Management Structure | Member- or manager-managed | Board of directors and officers (more formal) |
| Profit Distribution | Flexible, not tied to ownership % | Must match share ownership |
Benefits of Each Structure
LLC Benefits:
- Simpler startup and lower compliance burden
- Greater flexibility in profit distribution
- Suitable for single owners or small teams
S Corp Benefits:
- Potential savings on self-employment taxes
- Structured payroll may be advantageous for certain planning goals
- Appealing for businesses generating consistent profits
How Haven Financial Planning Can Help
At Haven Financial Planning, we understand that choosing between an LLC and S Corporation can feel overwhelming. Every small business has unique financial goals, risk tolerance, and tax situations. That’s why we take a personalized approach to help you:
- Understand the legal and financial implications of each entity type
- Coordinate with your tax professionals or recommend trusted resources
- Review your current business structure for potential optimization
- Help plan for future transitions as your business evolves
Whether you’re just starting out or looking to re-evaluate your existing structure, we’re here to provide strategic guidance that fits your journey.
Next Steps:
If you’re unsure which structure aligns best with your goals, you’re not alone. Let’s explore your options—one conversation at a time.Visit HavenPlanning.com to learn more or to schedule a time to talk with a financial planning professional.