S-Corp vs. LLC: Which Is Better for Your Texas Small Business?
The entity structure you choose for your Texas business affects how much you pay in taxes every single year. Most business owners pick one and never revisit it — but the right choice at the right time can save you thousands annually.
Understanding the LLC — and Its Tax Default
Simple Structure, Real Tax Costs
A Limited Liability Company (LLC) is one of the most popular business structures in Texas — and for good reason. It’s easy to form, provides personal liability protection, and requires minimal ongoing maintenance compared to a corporation.
But here’s what most new business owners don’t realize: an LLC is a legal structure, not a tax structure. By default, a single-member LLC is taxed as a sole proprietorship — which means 100% of your net business profit is subject to self-employment tax at 15.3%, on top of your regular federal income tax.
On $120,000 of net profit, that’s over $18,000 in self-employment tax alone — before you pay a single dollar in income tax. For many Texas business owners, this is the single largest tax they pay.
How an S-Corp Changes the Tax Picture
The Salary Split Strategy
An S-Corporation isn’t a different legal entity — it’s a tax election you make with the IRS. Your LLC can remain an LLC legally while electing to be taxed as an S-Corp.
Here’s how it changes your taxes: as an S-Corp owner, you split your business income into two buckets:
- Reasonable salary — paid to yourself as an employee, subject to payroll taxes (Social Security and Medicare)
- Distributions — the remaining profit passed through to you as an owner, which is not subject to self-employment tax
The result: only your salary portion gets hit with the 15.3% payroll tax. The distribution portion avoids it entirely. On a business generating $150,000 in net profit with a $70,000 reasonable salary, you pay payroll taxes on $70,000 instead of $150,000 — a potential savings of over $12,000 per year.
The IRS Requirement: Reasonable Compensation
This Is Where Business Owners Get Into Trouble
The IRS knows about the S-Corp salary strategy — and they require that you pay yourself a “reasonable salary” for the work you actually do. You cannot pay yourself $1 in salary and take everything as a distribution.
What’s reasonable? It depends on your industry, your role, and what you’d pay someone else to do your job. For a Dallas contractor who does the physical work himself, a reasonable salary might be $60,000–$85,000. For a consultant billing $250/hour, it might be higher.
Getting this right requires working with a CPA who understands your business. Underpaying yourself to minimize taxes is a red flag for IRS audits. Overpaying yourself defeats the purpose of the election.
When Does an S-Corp Election Make Sense?
The General Rule of Thumb
The S-Corp election isn’t right for every Texas business. There are real administrative costs — payroll setup, quarterly payroll tax filings, potentially a payroll service — that make it cost-ineffective at lower income levels.
As a general guideline:
- Under $50,000 net profit — Stick with LLC taxation. The savings don’t outweigh the costs.
- $50,000–$80,000 net profit — It’s worth evaluating. The math may work depending on your industry.
- Over $80,000 net profit — An S-Corp election almost always saves money. The higher your income, the more you save.
There’s also a timing consideration: the S-Corp election ideally happens at the start of a tax year. If you miss that window, you can still elect mid-year but it gets more complex. The best time to evaluate is now, regardless of when you plan to act.
LLC vs. S-Corp: A Side-by-Side Comparison
Making the Right Call for Your Texas Business
Both structures have real advantages. Here’s a simplified comparison:
- LLC (default taxation) — Simple, low admin cost, all profit subject to self-employment tax. Best for lower-income businesses or those just starting out.
- LLC with S-Corp election — More administrative requirements, payroll needed, but significant tax savings at higher income levels. Best for established Texas businesses generating $80,000+ in net profit.
The right answer depends on your specific numbers — your net income, your industry, your salary market rate, and your growth trajectory. A CPA who works with Texas small businesses can run the numbers for your exact situation and tell you definitively whether the switch makes financial sense.
At Quinones CPA Firm, we help Dallas and Rockwall business owners evaluate their entity structure as part of our year-round tax planning service. Schedule a free consultation and we’ll run the numbers together.
Have Questions About Your Business?
Every business situation is different. Schedule a free consultation and we’ll look at your specific numbers — and build a strategy that actually works for you.