S Corporation vs. LLC: Which Structure Saves You More on Taxes?
If you own a business here in the Ozarks, how it's taxed isn't just a legal formality. It directly affects how much tax you pay. Many owners I work with in Christian County and the Springfield area start with an LLC and wonder whether to elect S corporation status as their profit grows. Here's how to think about it.
What is an LLC?
A limited liability company is the simplest way to set up a business with liability protection, and forming one in Missouri is quick and inexpensive. By default, a single-owner LLC is taxed like a sole proprietorship, and a multi-owner LLC like a partnership.
All net profit flows through to your personal return.
You pay self-employment tax of 15.3% on 92.35% of your net profit (the Social Security portion stops at the annual wage base), plus federal and Missouri income tax.
That setup is easy to maintain and works well while profits are modest.
What is an S corporation?
An S corporation isn't a separate kind of entity you form. It's a tax election. An LLC or a corporation can elect to be taxed as an S corporation.
The advantage is that your profit splits into two parts: a salary, which carries payroll taxes, and distributions, which don't carry self-employment tax.
You pay yourself a reasonable salary through payroll.
Remaining profit can be taken as distributions.
The business files its own return each year (Form 1120-S) and runs payroll, with quarterly payroll filings.
A simple example
Say your business nets $120,000.
Taxed as a sole proprietorship: self-employment tax on 92.35% of $120,000 comes to about $16,955.
With an S corporation election and a $60,000 salary: payroll taxes on the salary are about $9,180. The other $60,000 is taken as distributions with no self-employment tax.
Difference: about $7,775 a year, before costs. From that, subtract what the S corporation costs to run: a payroll service, the 1120-S preparation, and Missouri unemployment and payroll filings. The net savings are real, but smaller than the headline number.
This is simplified. Your actual result depends on the salary your role supports, your other income, and Missouri tax.
Other things to weigh
Reasonable salary. Owners who work in the business must pay themselves reasonable compensation for the work they do. There's no set percentage. If the salary is too low, the IRS can treat distributions as wages and assess the payroll tax, with penalties and interest.
Recordkeeping. An S corporation needs payroll, a separate return, and clean books that keep business and personal money apart. I help clients set up simple systems so it doesn't become a burden.
Eligibility. An S corporation can have no more than 100 shareholders and one class of stock, and its owners generally must be U.S. individuals or certain trusts and estates. Most small businesses qualify.
Which is right for you?
Below roughly $40,000 to $50,000 of profit, default LLC taxation is often the simpler choice. Above that, the election usually starts to pay for itself, but it depends on your salary, your costs, and your other income. So I run the numbers on your actual profit before recommending it.
As a CPA in Ozark, I model the election, set up payroll if it makes sense, and handle the filings. See Tax Planning for how we plan the year.
Book a free consultation or call my office at (417) 973-2659.
This article provides general information, not tax advice for your specific situation. Tax results depend on your facts and on current law, and no particular outcome is guaranteed.
