"Should I be an LLC or an S corp?" is the most common question a new business owner in Oxnard asks an accountant, and the honest answer is that it depends on numbers most people have not run yet. The choice affects self-employment tax, California's franchise tax, liability protection, payroll obligations, and how much bookkeeping you sign up for.

Here is the framework we use in the office. It is general guidance, not advice for your specific situation, and it applies to a business with one or a few owners.

Start with what an entity does and does not do

Two separate questions are usually tangled together:

  • Legal structure, which is a state-law question: sole proprietorship, LLC, or corporation. This is what gives you liability protection.
  • Tax classification, which is a federal question: disregarded entity, partnership, S corporation, or C corporation. This determines how the profit is taxed.

An LLC can be taxed as a sole proprietorship, a partnership, or an S corporation. So "LLC vs. S corp" is not quite the right comparison. The real comparison is usually "LLC taxed as a sole proprietorship" against "LLC or corporation taxed as an S corporation."

The sole proprietorship or single-member LLC

Profit flows onto your personal return on Schedule C. You pay income tax plus self-employment tax of 15.3% on most of the profit, which covers Social Security and Medicare.

In California, a single-member LLC also owes the $800 annual LLC tax every year regardless of profit, plus an LLC fee that begins at $900 once gross receipts pass $250,000 and rises from there. A plain sole proprietorship with no LLC owes neither, but has no liability shield.

This structure is simplest: no payroll, no separate return, minimal bookkeeping. For a business netting under roughly $40,000 to $50,000, it is usually the right answer.

The S corporation

An S corporation (or an LLC that elects S status) pays its owner a reasonable salary through payroll, and the remaining profit is distributed without self-employment tax. That distribution is where the savings come from.

The cost side, which online calculators tend to leave out:

  • California taxes S corporations at 1.5% of net income, with a minimum of $800.
  • You must run real payroll, with quarterly filings to the IRS and the EDD, and the salary must be defensible. "Reasonable compensation" is a favorite audit topic.
  • A separate business return (Form 1120-S and California 100S) is due March 15, before your personal return.
  • Bookkeeping has to be clean enough to produce a balance sheet, not just a list of deposits.

Put together, an S corporation typically costs $2,000 to $4,000 more per year to operate than a sole proprietorship, between payroll service, the extra return, and the state tax. The self-employment tax saved has to exceed that before the election makes sense.

A worked example

An Oxnard landscaping contractor nets $120,000. As a sole proprietor, self-employment tax runs roughly $17,000. As an S corporation paying a $65,000 salary, payroll taxes on that salary are about $10,000, and the remaining $55,000 is distributed free of self-employment tax. Savings before costs: about $7,000. After California's 1.5% tax and the added compliance, the net benefit is closer to $3,000 to $4,000 a year. Worth doing, but not the windfall a social-media video promised.

Change the profit to $50,000 and the salary to $40,000, and the arithmetic turns negative. That is why we run the numbers first.

Other factors that tip the decision

  • Retirement contributions. A solo 401(k) or SEP is calculated on salary in an S corporation, so a very low salary limits what you can save.
  • Health insurance. Owner-paid premiums are handled differently in an S corporation and need to run through payroll.
  • Selling later. Buyers and their lawyers have preferences; an S corporation's history of clean books is an asset in a sale.
  • Multiple owners. Partnerships and LLCs taxed as partnerships allow flexible profit splits; S corporations do not.
  • Agricultural and seasonal businesses. Wide swings in annual profit make a fixed salary awkward. There are ways to handle it, but plan for it.

Timing

An S election filed by March 15 generally applies to the whole calendar year. A new entity has roughly two and a half months from formation. Missed deadlines can sometimes be fixed with late-election relief, but it is far easier to decide before the year starts.

The right entity is a calculation, not a preference. Bring last year's numbers and this year's projection to a CPA, and the answer usually takes one meeting.