LLC or S-Corp? It Depends on What You’re Trying to Build
Utah entrepreneurs often ask whether they should form an LLC or elect S-Corp status. The short answer? It depends. Each structure comes with distinct tax, liability, and management consequences—so the right choice depends on your business size, goals, and how you pay yourself.
Here’s a breakdown of what sets these two options apart—and how to decide which makes sense for your business.
First, What’s the Difference?
LLC (Limited Liability Company)
- Created under state law
- Offers liability protection for owners (members)
- Default tax treatment: pass-through (like a sole proprietorship or partnership)
- Easy to manage, flexible ownership
S-Corp (S Corporation)
- Not an entity type—it’s a tax election made by an LLC or corporation
- Pass-through taxation with payroll split (reasonable salary + distributions)
- Must meet IRS requirements (e.g., ≤100 shareholders, U.S. citizens/residents only)
- Requires strict recordkeeping and payroll compliance
For more on how Utah LLCs operate internally, see:
Do I Need an Operating Agreement for My Utah LLC?
Why Utah Businesses Choose LLCs
LLCs are the most popular structure for small businesses in Utah, and for good reason:
- Simple to form and manage
- No rigid ownership rules
- Default tax treatment avoids double taxation
- You can choose to be taxed as a sole proprietorship, partnership, or S-Corp later
- Fewer formalities than corporations (e.g., no board of directors required)
LLCs are ideal for:
- Freelancers and consultants
- Rental property owners
- Partnerships or family-run businesses
- Businesses not planning to take on outside investors
Why Some LLCs Elect S-Corp Status
For profitable businesses with consistent revenue, S-Corp election can reduce self-employment taxes.
Here’s how:
- As an LLC, all profit is subject to self-employment tax
- As an S-Corp, you pay yourself a reasonable salary (subject to payroll taxes), and the rest of your profit is taken as a distribution, which avoids self-employment tax
Example:
If your LLC earns $120,000 net income:
- As a default LLC: all $120,000 is subject to self-employment tax
- As an S-Corp: pay yourself a $70,000 salary, take $50,000 as a distribution—only $70k is taxed for payroll purposes
But… S-Corps come with stricter rules:
- You must run payroll
- You must file a corporate tax return
- You must track salary vs. distribution accurately
- You can’t easily bring on foreign owners or complex ownership structures
What Utah Business Owners Should Consider
Ask these questions before making a decision:
- Will I earn enough profit to justify the complexity of an S-Corp?
- Am I ready to run formal payroll and file extra tax returns?
- Do I want flexibility in how I manage and structure my business?
- Will I bring on partners or outside investors?
- Am I prioritizing tax savings, ease of management, or growth?
If you’ll be entering into commercial leases or taking on long-term obligations, the choice of entity may also impact how those responsibilities are structured. For more, see:
What Landlords and Small Businesses Need to Know About Commercial Leases in Utah
And if you’re monitoring compliance issues, be aware that certain structures (especially S-Corps) may add reporting burdens under federal law. For an example, read:
Understanding the Recent Suspension of Beneficial Ownership Information (BOI) Reporting Requirements
Final Thoughts
LLCs offer flexibility and simplicity, making them a great starting point for most Utah small businesses. S-Corp election can offer tax savings—but only if your business is profitable enough to justify the added burden.
The right choice isn’t always obvious, and the wrong one can cost you more than it saves.
If you want help forming your Utah LLC or deciding whether an S-Corp election makes sense, Duckworth Legal Group can help.
Call (801) 882-7444 or email info@duckworthlegalgroup.com to make sure your entity choice fits your business—not someone else’s.