Should Your Solo Business Become an S Corp? Here’s How to Decide

Maybe you’ve heard a few mentions of the tax-saving power of S Corps before. Or perhaps (like many solopreneurs) your eyes immediately glaze over whenever anything tax-related comes up in conversation.

Whether you’re coming into this with some basic familiarity or are scratching your head thinking, “S Corp…huh?”, this is what you need to know: an S Corp is a tax status you can elect for your solo business that can lead to thousands in tax savings.

It’s a compelling selling point, but S Corps aren’t the default right move for every solo business owner. Wondering if it’s the right time to make the LLC to S Corp upgrade? Here’s what you need to know. 

LLC vs. S Corp: How Are They Different?

Let’s back up for a minute. Before you can decide whether an LLC or S Corp is right for your business-of-one, you first need to get a grasp on what they are—and how they’re different.

One common misconception is that you need to choose either an LLC or an S Corp. You don’t. You can have both. Ultimately, what you’re deciding is whether you want to run your business as just an LLC or as an LLC that’s taxed as an S Corp. 

Sole proprietorship is a simple approach—but it can also be a risky one. And that’s why many solos take steps to establish a formal business entity, with most choosing a Limited Liability Company (LLC).

This offers far more liability protection because it separates your business finances and obligations from your personal ones. Your personal assets (think things like your personal savings account or your home) aren’t at risk if your business goes into debt or gets into legal hot water.

The major downside of both sole proprietorships and LLCs? Self-employment tax.

As the name implies, every self-employed person is required to pay this tax (sorry, there’s no escaping it) to cover Social Security and Medicare. And, with either of the above business structures, you pay self-employment tax (that’s a whopping 15.3%) on all of your taxable income. That can really add up, especially if you’re a high earner.

What’s an S Corp?

This is where S Corps come into play. While it’s commonly talked about in conversations about business entities, an S Corp isn’t actually an entity on its own—it’s a tax status. You elect S Corp status on top of your established business entity (like your LLC). Technically speaking, your business is still an LLC, but you’ve opted to be taxed as an S Corp.  

What does that do for you? Well, in many cases, it lowers your tax bill. As an S Corp, you can split your income into two buckets: a reasonable salary and your business profits. Unlike an LLC or sole proprietorship, you only pay self-employment tax on your salary, which is where the major savings come into play. 

In short, you aren’t choosing if you want an S Corp instead of your LLC. You’re deciding if you want to elect S Corp status on top of your existing LLC. It’s a tax-saving strategy—not an entirely different entity. 

Wondering how much your solo business could save as an S Corp? Use our tax calculator to find out.

When’s the Right Time to Elect S Corp Status?

An S Corp sounds great, right? And the benefits inevitably lead you to this question: Should you elect S Corp status for your business-of-one? Is it the right time?

There isn’t necessarily a “perfect” or “right” time to become an S Corp. Like so many other things in your solo business, the decision is nuanced and personal. With that said, there are a few telltale indicators that electing S Corp status could be a smart move:

• You’re Earning More Than $60,000: Experts generally agree that you’ll want to be earning at least $60,000 in business profits per year before electing this tax status. If you’re above that threshold (and especially if you’re earning that income consistently or predict ongoing business growth), an S Corp can mean serious tax savings.
• You’re Interested In Better Tax Planning: Feeling ready to move from pure tax survival to tax optimization? If you’ve outgrown DIY accounting and are thinking more like a CEO than a freelancer, you’re ready for an S Corp.
• You’re Willing to Take on the Administrative and Compliance Requirements: An S Corp introduces some extra logistics into your business operations, like regularly running payroll and keeping your personal and business finances separate. Fortunately, you don’t need to do this alone. From S Corp election to bank account setup to ongoing bookkeeping, Lettuce can handle it all for you.
• You’re Committed to Business Ownership: If you’re looking at business ownership as a temporary adventure or a stopgap between full-time jobs, it’s not worth taking the steps to elect this tax status. You’ll need to be fully committed to your solo business—both now and for the foreseeable future.

Is Lettuce right for you?

See if Lettuce can help you keep more of what you earn with our short quiz.

Take Quiz

Scoring Major Tax Savings (Without the Stress)

Did you check the boxes and decide that an S Corp is a smart strategy for your business-of-one? 

We’ll be honest: There’s a little bit of elbow grease involved in making this upgrade. You’ll need to establish your LLC and open a business bank account (if you don’t already have those in place). Then you’ll submit Form 2553 to the IRS to elect S Corp status. 

Here’s the good news: You don’t need to do this yourself. If you’re feeling overwhelmed by those setup steps and the ongoing work involved in maintaining an S Corp (like payroll and accurate recordkeeping), Lettuce is here to help.

Lettuce will take care of establishing your LLC, opening your business bank account, and completing your S Corp election (yep, even the paperwork) for you. Plus, you can put all of your other accounting tasks—like payroll, tax payments, expense categorization, and more—on autopilot too. 

Put simply, Lettuce will help you get all of the benefits of your S Corp status—without any of the burdens. Sound like something you need? Learn more about Lettuce now.