LLC vs. S-Corp in Texas: Which Saves You More on Taxes?

It's one of the most common questions Texas business owners ask me, and one of the most misunderstood. The first thing to know: an LLC and an S-corp are not the same kind of thing. An LLC is a legal entity. An S-corp is a tax election. In fact, an LLC can choose to be taxed as an S-corp, so it's often not 'either/or.'

How an LLC is taxed by default

By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership. In both cases, the business's net profit passes through to your personal return and is generally subject to self-employment tax (Social Security and Medicare) of roughly 15.3% on top of income tax.

What the S-corp election changes

When an LLC elects S-corp taxation, the owner pays themselves a 'reasonable salary' through payroll (which is subject to payroll taxes), and the remaining profit can be taken as distributions that are generally not subject to self-employment tax. For a profitable business, that can mean meaningful savings.

The catches

The S-corp route isn't free. The IRS requires a reasonable salary, you'll need to run payroll, and there's an additional business tax return (Form 1120-S) plus more administration. In Texas there's no personal state income tax, but a state franchise tax may apply depending on revenue. Those added costs need to be weighed against the self-employment tax you'd save.

When it makes sense

As a rough guide, the S-corp election tends to pay off once your net profit is high enough that the self-employment tax savings clearly exceed the added payroll and filing costs. The right threshold depends on your numbers, which is exactly the kind of analysis I'll run for you before you decide.

The bottom line

Don't choose based on a rule of thumb you read online. Run the actual numbers with a CPA who can model your situation and the trade-offs.