S-Corp vs. LLC in 2026: The Decision Isn't What You Think

Every year we sit down with a new founder or a client who's outgrown their sole proprietorship, and eventually the question comes up: "Should I be an S-corp or an LLC?"

The framing is wrong. The choice isn't between two things — it's between three, and how you answer depends on things most people don't think about until they get burned. Let's walk through what actually matters in 2026.

The setup: three structures, not two

• Single-member LLC. For federal tax purposes, disregarded. You file Schedule C. State-level LLC tax and fee still apply (California: $800 minimum plus gross receipts fee).
• Multi-member LLC or partnership. Files Form 1065. Members get K-1s. Self-employment tax applies to active members on their distributive share plus guaranteed payments.
• S-corp. Files Form 1120-S. Owners are W-2 employees who take reasonable compensation, plus distributions that are not subject to payroll tax.

The "obvious" answer everyone jumps to — "elect S-corp status, save payroll tax" — is right about half the time. Here's what determines which half you're in.

What the S-corp math actually looks like

The S-corp payroll-tax savings come from the gap between total profit and reasonable compensation. If you're a solo consultant netting $200,000 and reasonable comp for your role is $120,000, you have $80,000 of distributions that avoid the 15.3% self-employment tax — roughly $12,000 of annual savings.

That's real money. But you're also paying for:

• Payroll setup and administration — $500–$1,500/year in software plus your time.
• A separate 1120-S return — $1,500–$3,000/year at a real firm.
• State-level S-corp taxes — California charges a 1.5% franchise tax on S-corp net income ($800 minimum). New York City charges its 8.85% UBT with limited pass-through.
• QBI base reduction — the wages you pay yourself reduce your qualified business income and, if you're near the QBI phase-in, that costs deduction.
• Retirement plan complexity — a solo 401(k) still works, but SEP contributions are capped at 25% of W-2 wages, which for a low-comp S-corp owner can dramatically shrink your contribution room.

Add it up and the true break-even for most consultants is somewhere in the $100–$150K net income range. Below that, S-corp is a net loss. Above it, S-corp starts to pay.

What the LLC advantage actually is

LLCs — particularly multi-member LLCs — win on flexibility. Special allocations (assign losses to one partner, gains to another) are only available in a partnership. Sweat equity is much cleaner in an LLC than an S-corp, where profits-interest grants get complicated fast. Bringing in investors is far cleaner in an LLC because S-corps have brutal one-class-of-stock and eligible-shareholder rules that limit what you can do.

If you're the only owner and there's no near-term plan to bring in anyone else, this doesn't matter. If there's any chance of a partner, a passive investor, or a strategic co-founder, the LLC route is meaningfully more flexible and worth the higher payroll-tax cost.

What OBBBA changed

The permanent QBI deduction under OBBBA changes the math above in one important way: for owners in service trades (SSTB — attorneys, CPAs, consultants, financial advisors), the phase-in thresholds are now high enough that pass-through structure re-becomes attractive at income levels where S-corp used to dominate. Rerunning the numbers for existing S-corp elections on service businesses is worth the effort in most cases.

When the "wrong" choice is fine

We regularly have clients who could optimize by converting from LLC to S-corp and choose not to, because they value the flexibility, the simpler payroll picture, or the ability to bring in a partner without restructuring. That's fine. Entity choice is a business decision, not just a tax decision. The tax number is one input.

What isn't fine is making the choice by default. "My friend said S-corp" is not a strategy. "My last accountant elected S-corp on my first return and we never revisited it" is not a strategy either.

What we do

For every new client with an active business, we run a three-year projected comparison of the three structures using their actual income, their state of residence, and their retirement contribution goals. Usually the answer is clear. Occasionally the answer is "it depends on whether you're planning to sell in three years" or "let's revisit after you decide about the partnership offer." Either way, you know why you're structured the way you are.

If your entity structure is on autopilot and hasn't been reviewed since the LLC-vs-S-corp question first came up, that's a conversation worth having.

David Meyer, CPA is a Partner at Laléa & Black and leads the firm's tax strategy practice for HNW individuals, cross-border filers, and closely held businesses.