LLC vs S-Corp vs Sole Prop: Cost and Tax by Income
"Should I be an LLC or an S-corp?" is one of the most common — and most muddled — questions in self-employment, partly because the two aren't the same kind of thing. This guide untangles the three options, grounds the cost side in real 2026 state fees, and gives you a decision table by income so you can see which structure fits where you are now.
Three structures, two decisions
There are really two separate decisions hiding in the question:
- Legal: stay a sole proprietor (no separate entity) or form an LLC (liability protection).
- Tax: keep default taxation (sole-prop-style, all profit hit with SE tax) or make the S-corp election (salary + distributions).
An LLC is a legal entity; an S-corp is a federal tax election an LLC can make. So the real menu is: sole prop, LLC taxed as a sole prop, or LLC that has elected S-corp treatment.
Sole proprietor
The default when you start earning on your own — no formation, no state entity, no annual fee. You report business income on Schedule C, and all net profit is subject to the 15.3% self-employment tax (plus income tax). The catch is liability: there's no legal separation between you and the business, so business debts and lawsuits can reach your personal assets. Cheapest and simplest; least protective.
LLC
An LLC is a state-formed entity that puts a liability shield between your business and your personal assets. Crucially, forming one doesn't change your taxes by itself: a single-member LLC is a "disregarded entity," taxed exactly like a sole proprietorship, with all profit still subject to SE tax. What you're buying is legal protection and credibility — and a state filing fee plus (usually) an annual cost. The LLC is the base you'd later put an S-corp election on top of.
The S-corp election
Elect S-corp treatment (via Form 2553) and your business income splits into a reasonable W-2 salary — subject to payroll tax — and distributions, which escape the 12.4% Social Security and 2.9% Medicare taxes. That's the tax saving. But it adds cost: running payroll, filing a separate Form 1120-S return, and in some states a franchise tax or fee. The full salary/distribution arithmetic — and where the crossover income sits — is in the S-corp election math guide.
What the states actually charge
Cost is where the choice gets concrete, and it's almost entirely state-driven. Using Reckix's 2026 state fee data, the spread is wide:
| State | Formation fee | Ongoing / notable |
|---|---|---|
| Montana | $35 | Lowest formation fee in the country; $20 annual report |
| Kentucky | $40 | $15 annual report |
| Missouri / New Mexico | $50 | No annual report fee at all — cheapest ongoing |
| California | $70 | $800/yr minimum franchise tax — most expensive to keep |
| Massachusetts | $500 | ~$500/yr annual report → ~$1,000 in year one |
| Nevada | $425 | ~$350/yr ongoing (list + business license), despite no income tax |
The lesson: an LLC's real cost is dominated by your state's ongoing fee, not the one-time formation fee. California's $800 annual franchise tax alone can outweigh a modest S-corp tax saving, which is why the entity and tax decisions have to be made together, in your state. For the full ranking, see the cheapest states to form an LLC and annual fees explained.
A decision table by income
| Net profit | Common fit | Why |
|---|---|---|
| Under ~$40,000 | Sole prop, or a cheap-state LLC | S-corp costs outweigh savings; form an LLC mainly for liability protection, not tax |
| ~$40,000–$80,000 | LLC taxed as sole prop | Liability shield is worth the fee; SE-tax savings from an S-corp still usually don't clear its added cost |
| ~$80,000+ | LLC + consider S-corp election | Payroll-tax savings on distributions start to beat the payroll/return/state costs — run the math |
| High + rising | LLC + S-corp election | Savings are clearest, though they flatten once salary hits the $184,500 Social Security wage base |
These are starting points, not rules — your state's LLC cost (California and Massachusetts especially) and your reasonable-salary figure can move the crossover up or down. Always price the ongoing state fee into the decision.
Price your state. The calculator shows your state's real LLC formation and annual costs, so you can weigh the entity decision against the tax one with actual numbers.
Open the LLC Cost by State calculator →- IRS, Form 2553 (Election by a Small Business Corporation)
- IRS, Schedule SE (Self-Employment Tax)
- State LLC fees: 50-state data compiled for Reckix from Secretary-of-State sources including the California FTB LLC page ($800 franchise tax) and the Massachusetts Secretary of the Commonwealth filing fees
Frequently asked questions
What is the difference between an LLC and an S-corp?
They are different kinds of thing. An LLC is a legal business entity formed at the state level that gives you liability protection. An S-corp is a federal tax election, not an entity — an LLC (or a corporation) can elect to be taxed as an S-corp by filing Form 2553. So "LLC vs S-corp" is really "LLC taxed as a sole prop vs LLC taxed as an S-corp." A sole proprietorship, by contrast, is no separate entity at all.
Do I save on taxes just by forming an LLC?
No. A single-member LLC is a "disregarded entity" by default — the IRS taxes it exactly like a sole proprietorship, with all profit subject to the 15.3% self-employment tax. Forming an LLC buys you liability protection and credibility, not a lower tax bill. The tax savings only come if the LLC then elects S-corp treatment and you split income into salary plus distributions.
How much does an LLC cost per year?
It varies enormously by state. Formation runs from about $35 (Montana) to $500 (Massachusetts), and annual costs range from $0 in states like Missouri and New Mexico to $800 a year in California (its minimum franchise tax) and roughly $500 a year in Massachusetts. Some states also add a franchise tax, publication requirement, or registered-agent fee. Check your own state’s current figure before filing.
At what income should I consider an S-corp election?
Because the S-corp election adds real cost — payroll, a separate business return, and possibly a state franchise fee — the payroll-tax savings usually only outrun those costs once profit is comfortably into the five figures, often around $80,000+ and clearer above roughly $100,000. Below that, a sole proprietorship or an LLC taxed as one is frequently simpler and cheaper overall.
This article is educational information, not tax, legal, or financial advice, and not an offer of any product. State LLC filing and annual fees change frequently — verify the current figure with your state’s Secretary of State before filing — and the tax treatment described is general; your facts may differ. Figures reflect published 2026 guidance and rates as of July 2026 and can change; confirm current numbers and how they apply to your situation with a licensed tax professional or advisor. Last reviewed July 2026. No liability is accepted for decisions made from this content.