If you’re a consultant, coach, strategist, or freelancer offering professional expertise for a living, you’ve probably wondered at some point: Should I form an LLC or go the S Corp route? The question isn’t just academic—it can affect how much you pay in taxes, how you get paid, your risk exposure, and even how potential clients perceive your business.

While both options offer liability protection and the credibility of a formal business structure, they come with very different tax strategies and operational requirements. Choosing between an LLC and an S Corporation isn’t just about paperwork—it’s about aligning your business with your income goals, work style, and long-term vision.

Understanding the Basics: What’s the Real Difference?

Let’s start by clearing up a common misconception: an S Corporation isn’t a legal business type like an LLC or a corporation. It’s a tax classification made with the IRS. In fact, many S Corps are actually LLCs or corporations that elected to be taxed under Subchapter S of the Internal Revenue Code.

LLC: The Legal Default for Flexibility

An LLC (Limited Liability Company) is a legal business entity formed at the state level. It gives you liability protection and default pass-through taxation, where profits are taxed on your personal return.

S Corp: A Tax Strategy Built Into a Structure

An S Corporation isn’t formed—it’s elected. You can form an LLC and later elect S Corp tax treatment with the IRS using Form 2553. The magic of an S Corp lies in its tax structure: you split your income into salary (which is taxed with payroll taxes) and profit distributions (which are not).

For consultants who consistently earn more than they spend, the S Corp offers a legitimate way to reduce your tax burden—but not without additional complexity.

The Tax Breakdown: Where the Savings (and Headaches) Begin

Consultants often have high-profit margins and low overhead. That’s why this debate is so common in the industry. Understanding how each structure handles taxes is essential to making an informed decision.

LLC Default Taxation

With an LLC (without S Corp election), your net income flows directly to your personal tax return via Schedule C. All of it—100%—is subject to both income tax and self-employment tax (15.3%). That tax covers Social Security and Medicare.

S Corp Taxation Strategy

With an S Corp election, your income is split into two buckets:

• Salary: Must be “reasonable” for the work you perform. Subject to income tax and employment tax (just like a regular job).
• Distributions: Not subject to employment taxes. This is where the tax savings come from.

Example:

Let’s say you earn $120,000 in profit as a consultant.

• LLC: You pay self-employment tax on the full $120,000 = $18,360 in SE tax alone.
• S Corp: You pay yourself a $60,000 salary (SE tax = $9,180), and take $60,000 as distributions (no SE tax).

Estimated savings: $9,180 in self-employment tax.

The Catch?

S Corps require you to run payroll (including quarterly filings and W-2 forms), maintain separate accounting, and follow more strict formalities. That often means hiring a payroll service and possibly a tax advisor—eating into your savings if you’re not earning enough to justify it.

How Much Are You Earning? That’s the Real Litmus Test

So when does the S Corp start to make sense? It usually comes down to how much your business is netting in profit—after all expenses are paid. A good rule of thumb is this:

• Below $40,000 net profit: Stick with an LLC. The tax savings don’t outweigh the complexity.
• $40,000–$70,000: Consider the S Corp, especially if your income is stable and you can outsource admin.
• $70,000+: You’re likely leaving money on the table if you’re not using an S Corp.

Consultants often hit the S Corp sweet spot faster than product-based businesses because of the low cost of delivering services. If you’re billing at $150/hour and working 30 hours a week, you’re already generating over $200K/year gross. Even with minimal expenses, that’s a strong candidate for S Corp election.

Administrative Differences: Time, Tools, and Headaches

Taxes aside, managing an S Corp comes with more paperwork and more rules. If you’re already buried under client deliverables, proposals, and invoices, it’s worth understanding what you’re signing up for.

LLC Simplicity

• No payroll requirement
• Single-member LLCs file Schedule C with Form 1040
• Minimal ongoing compliance (maybe an annual report depending on your state)

S Corp Compliance

• Must run payroll (even for yourself)
• File Form 1120-S annually
• Issue W-2 to yourself and potentially file quarterly payroll taxes (Form 941)
• Required to keep corporate minutes and adopt bylaws

This isn’t necessarily overwhelming—especially if you use tools like Gusto for payroll or hire a bookkeeper—but it’s not hands-off either.

Legal Protection: LLC vs. S Corp Status

In terms of asset protection, LLCs and S Corps are mostly equal—assuming your S Corp is built on an LLC or corporation foundation. Both limit your personal liability from business debts and lawsuits.

However, courts can “pierce the corporate veil” if you don’t maintain proper separation between personal and business finances or follow corporate formalities. That’s why even LLCs should operate with a separate bank account, maintain clear records, and avoid personal use of business funds.

Bottom line: both options protect your personal assets if used correctly.

Client Perception and Growth Goals

Most clients don’t know or care how you’re structured—as long as you send a legit-looking invoice. That said, some large companies require contractors to be incorporated (LLC or S Corp) before they’ll issue a contract or 1099.

Additionally, an S Corp can make your business appear more established when you start hiring subcontractors or positioning yourself for agency-level work. It’s a subtle branding advantage, but in high-trust industries like consulting, appearances matter.

Hiring and Scaling Considerations

If you’re planning to hire a VA, junior consultant, or marketing assistant, S Corp status integrates better with payroll systems and formal HR structures. You’ll also already have a payroll provider in place, making it easier to grow a team.

Decision Framework: LLC or S Corp for Consultants?

Still not sure? Use this decision framework to guide you:

Question	If YES	Suggested Structure
Is your annual net income under $40,000?	Yes	LLC (default taxation)
Do you want the simplest structure possible?	Yes	LLC
Is your net income over $60,000–$70,000?	Yes	LLC with S Corp election
Are you ready to run payroll or hire help?	Yes	LLC with S Corp election
Are you already outsourcing bookkeeping?	Yes	S Corp is easier to manage with help

Strategy Over Simplicity

Consultants are in a unique position—they tend to generate strong income with low expenses, which makes tax efficiency especially important. While LLCs offer simplicity and solid protection, the S Corp structure becomes very attractive once your income reaches a certain level.

That said, tax strategy is just one piece of the puzzle. Consider your goals, your growth plans, and your appetite for admin work. Start with an LLC—it’s easy to manage and upgrade. Then, once your profit justifies it, make the S Corp election and enjoy the savings (and yes, the paperwork too).

Remember: the smartest tax strategy is the one that keeps more money in your pocket without overwhelming you. Know the rules, do the math, and pick the structure that fits the business you’re building—not just the one you have today.