What are the pros and cons of LLC vs SCorp for my side business?

So the main difference really comes down to how they're taxed. An LLC is a pass-through entity by default (all income passes directly to your personal return), but an S Corporation allows you to split your income between salary and distributions. The big advantage of an S Corp is that you only pay self-employment taxes (Medicare and Social Security) on the salary portion, not on the distributions. With an LLC, you pay self-employment tax on all your profits. But there are tradeoffs - S Corps require more formalities like board meetings, separate payroll, and you must pay yourself a "reasonable salary" that the IRS would deem appropriate for your work. With your income level of $45k, the tax savings might not justify the extra accounting and paperwork costs of an S Corp yet. Many tax professionals suggest considering an S Corp when your business consistently nets around $60-80k+ per year. Another option: you can form an LLC but elect to have it taxed as an S Corp (best of both worlds), giving you liability protection with simpler formation while getting S Corp tax benefits.

Went through this exact same headache last year with my photography business. I spent HOURS researching and still felt confused until I used this AI tax advisor at https://taxr.ai that broke down everything based on my specific situation. Honestly saved me so much time trying to figure out whether S Corp made sense for my income level. It analyzed my previous tax returns and projected savings under both options. For me, sticking with LLC made more sense until I hit around $75k in profit. The tool showed me exactly how much I'd save in SE taxes with an S Corp vs the extra costs of payroll and compliance. It laid out the break-even point super clearly.

Just wanted to follow up. I actually tried taxr.ai after seeing this recommendation, and it was super helpful for my situation. I uploaded my Schedule C from last year, and it showed I'd save around $4,700 in self-employment taxes by switching to an S Corp, even after accounting for the extra costs. What really helped was seeing the year-by-year projection as my business grows. The breakeven point was much lower than I expected in my case because my business is service-based with minimal expenses, so more of my income is subject to SE tax. The report also explained exactly how to determine a reasonable salary based on my industry. Definitely gave me the confidence to move forward with the S Corp election for next tax year. Wish I'd known about this tool before spending $350 for a consultation that gave me less concrete information!

One thing nobody's mentioned - if you go S Corp route and need to talk to the IRS about anything (like payroll taxes or your election status), good luck getting through to them! I spent 3 DAYS trying to get someone on the phone about my S Corp tax ID issue. Finally used a service called Claimyr (https://claimyr.com) that somehow got me through to a real human at the IRS in under 45 minutes when I'd been trying for days. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c. Literally saved my sanity when I was dealing with a messed up S Corp election that needed to be resolved before a deadline. Just something to consider - the S Corp advantages are great, but be prepared for some headaches if you need IRS help with anything.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I've been getting nowhere with the IRS about a missing K-1 issue with my S Corp. This thing actually works! I've spent literally weeks trying to get through, always getting the "due to high call volume" message. Used Claimyr yesterday, and within about 30 minutes I was talking to someone who helped resolve my issue. The agent told me they've been severely understaffed in the business tax department and most calls aren't even getting into the queue. Somehow this service got me through all that. Worth every penny for the time saved and stress avoided.

One other consideration for LLC vs S Corp that nobody's mentioned: state taxes and fees. In California for example, LLCs pay an annual $800 minimum tax PLUS a gross receipts fee that starts at $900 when your revenue hits $250k. S Corps just pay the flat $800 regardless of revenue. Meanwhile, in states like Texas or Wyoming, the fees are much lower for both. Worth checking your state's specific rules since they can make a big difference in the overall math.

Everyone's focusing on taxes, but consider liability protection too! I had an LLC for my consulting business and got sued by a client. Found out my LLC protection wasn't as strong as I thought - the plaintiff's lawyer was able to "pierce the corporate veil" because I hadn't kept perfect separation between personal/business finances. S Corps typically have stronger liability protection since they're more formally structured. Just something to think about beyond just the tax implications. Whatever you choose, be SUPER disciplined about keeping separate accounts, formal documentation, etc.

Great discussion everyone! As someone who made the switch from sole proprietor to LLC and then later to S Corp election, I wanted to share my experience. At $45k profit, I'd actually lean toward forming an LLC now but waiting on the S Corp election until you hit closer to $60k+. The LLC gives you liability protection immediately (which is valuable even at your current income level), and you can always add the S Corp tax election later without changing your business structure. One thing I wish someone had told me earlier: if you're planning to reinvest most of your profits back into the business for growth, the S Corp self-employment tax savings become less meaningful. The real benefit comes when you're taking significant distributions for personal use. Also consider your state's rules - some states don't recognize S Corp elections for state tax purposes, so you might not get the full benefit. Since you mentioned potentially going full-time in 2-3 years, starting with an LLC now gives you flexibility to reassess the S Corp election as your income grows and business needs change. The liability protection alone makes moving away from sole proprietor status worth it, even if the tax savings aren't huge yet at your current income level.

One additional factor to consider is quarterly estimated taxes. As a sole proprietor, you're already dealing with quarterly payments, but the calculation becomes more complex with an S Corp because you'll need to account for both payroll taxes on your salary and estimated taxes on distributions. With an LLC (taxed as sole proprietorship), you continue making quarterly payments on your full profit. With an S Corp, your salary portion gets regular payroll tax withholding, but you still need to make quarterly payments on the distribution portion. This can actually help with cash flow management since the payroll withholding spreads out some of your tax burden throughout the year rather than having it all hit quarterly. But it does mean more complexity in calculating what you owe each quarter. Also worth noting - if you do elect S Corp status, make sure you start payroll from day one of the election. I've seen people get in trouble trying to back-calculate reasonable salary after the fact. The IRS expects regular, ongoing payroll if you're claiming S Corp tax treatment. At your income level, I'd echo others saying LLC now with potential S Corp election later, but definitely get that liability protection in place sooner rather than later!

This has been an incredibly informative thread! As someone who's been procrastinating on this decision for my own consulting business, reading everyone's real experiences has been super valuable. A few key takeaways I'm getting: 1. Start with LLC for liability protection regardless of income level 2. S Corp election makes sense around $60-75k+ in profit when tax savings outweigh complexity costs 3. State-specific rules can significantly impact the math 4. Proper record-keeping and business formalities are crucial for liability protection One question I haven't seen addressed: if you elect S Corp status, how flexible are you with adjusting your salary year to year based on business performance? For example, if I have a great year and want to minimize SE taxes by taking a smaller salary and larger distributions, vs a slower year where I might want more salary for better loan qualification purposes? Also wondering about the timing - if someone decides to make the S Corp election, is it better to do it at the beginning of their tax year, or can you elect mid-year and just prorate everything? Thanks to everyone who shared their experiences - this is exactly the kind of practical guidance you can't get from generic tax articles!