Whether you’re starting a business or reconsidering the structure of one you’ve already created, the “LLC or S-Corp” crossroads is a common one. Although the question is common, the road to the answer is usually dotted with Google and AI rabbit holes.
Moreover, the question is nuanced even before considering the “expat” factor. The question of business entity raises some of the most nuanced considerations in small business planning. The best answer for you depends on many factors. These include, but are not limited to:
- where your business is at right now,
- what stage of growth you’re in,
- how much you currently earn, and
- what matters to you beyond the tax bill?
At Blue Haven Advisors, we can offer balanced takes from the POV of a CPA and a business attorney because we’ve got one of each on our team.
Read on to see how we think about the question of LLC vs S-Corp.
First things first: What are we actually comparing?
The LLC
A Limited Liability Company (LLC) is a legal entity formed under state law that provides its owners (called “members”) with personal liability protection. That’s the legal value: your personal assets are shielded from business debts and lawsuits (with some important limitations).
By default, the IRS doesn’t recognize the LLC as a separate tax entity. A single-member LLC is treated as a “disregarded entity.” Its income flows to your personal Form 1040 on Schedule C.
A multi-member LLC is taxed as a partnership. In both cases, all net income from the business is subject to self-employment tax (currently 15.3% on the first ~$168,000 and 2.9% above that).
The S-Corporation
An S-Corporation is a tax election, not a different type of legal entity. You can elect S-Corp status for an existing LLC or a regular corporation by filing Form 2553 with the IRS. Once you do, the tax treatment changes significantly.
As an S-Corp, you (the owner-operator) must pay yourself a “reasonable salary.” That salary is subject to payroll taxes. But profits distributed beyond that salary, which are called distributions, are NOT subject to self-employment tax. That difference can create tax savings under the right circumstances.
How our CPA thinks about this question
From a pure tax optimization standpoint, here’s the framework I use with clients:
When the LLC (Default Tax Treatment) Often Makes Sense
- Your net business income is under approximately $50,000–$60,000 per year. At that level, the administrative cost of S-Corp payroll typically exceeds the tax savings.
- You’re in the startup phase, and profits are inconsistent. The flexibility of an LLC without payroll requirements is valuable when your income is unpredictable.
- You have business losses or significant deductions that offset income. Self-employment tax savings from an S-Corp aren’t meaningful if there aren’t significant distributions to shelter.
- You’re an expat eligible for the Foreign Earned Income Exclusion (FEIE). The interaction between the S-Corp structure, the FEIE, and payroll taxes requires careful analysis. Particularly where expats are concerned, the “standard” S-Corp logic often doesn’t apply cleanly.
Related reading: Taxation for Expats: A Guide for Americans Abroad
When the S-Corp Election Tends to Pay Off
- Your net business income is consistently above $60,000–$80,000 per year. The self-employment tax savings on distributions above your reasonable salary can meaningfully reduce your tax burden.
- You’re a consultant, agency owner, or professional service provider with relatively low business expenses and high margins.
- You’re in a position to set a defensible “reasonable salary” that is meaningfully lower than your total net income. The IRS does scrutinize low salaries, so this needs to be done properly.
- You want to contribute to a Solo 401(k) or SEP-IRA at higher levels. Retirement contribution limits are calculated on W-2 wages for S-Corp shareholders, which opens up additional planning opportunities.
Here’s a simplified illustration
Imagine your business earns $150,000 in net profit.
As a single-member LLC, the entire $150,000 is subject to self-employment tax (approximately $21,000+). As an S-Corp, you pay yourself a reasonable salary of $80,000 (subject to payroll taxes of approximately $12,000). Then, you take the remaining $70,000 as a distribution (no self-employment tax).
The difference could be $7,000–$9,000 per year in federal tax savings — minus the cost of payroll processing and additional tax preparation (typically $1,500–$3,000/year). Net savings: potentially in the thousands, but always worth modeling for your specific situation.
How our international attorney thinks about the question of one entity vs another
From a legal and governance standpoint, the LLC and S-Corp raise different considerations that pure tax analysis misses.
Flexibility vs. Formality
LLCs are extraordinarily flexible. An LLC’s operating agreement can be structured almost any way the members want: custom profit allocations, multiple classes of membership interests, flexible management structures.
S-Corps are rigid by comparison. Federal S-Corp rules allow only one class of stock, cap shareholders at 100, and restrict ownership to U.S. citizens and residents. If you ever want to bring in a foreign investor or create a preferred equity tier, S-Corp status creates significant complications.
The Operating Agreement: More Important Than You Think
Whether you choose LLC or S-Corp treatment, your operating agreement (for an LLC) or bylaws and shareholder agreement (for a corporation) is the document that actually governs your business relationships. We’ve seen costly disputes arise from businesses that formed properly but never executed a thoughtful operating agreement.
Pullquote: The entity type matters far less than the quality of the foundational documents governing it.
Multi-Owner Situations
If you currently have or plan to have multiple owners, the choice between LLC and S-Corp significantly affects how you can structure equity, distributions, and buyout provisions. LLCs offer more flexibility for unequal distributions among members (useful when partners contribute differently). S-Corps must distribute proportionally to ownership percentage. This alone can determine the right entity structure for a co-owned business.
A commonly confounding factor: Expat business owners
So, this is the point in the article where we have to make a confession. Everything we just wrote might not be applicable to your situation.
If you’re a U.S. citizen living abroad and operating a business through a U.S. entity, there are additional layers to consider. A few of them, at a glance:
- Foreign Earned Income Exclusion (FEIE) and self-employment tax: The FEIE reduces your income tax on foreign-earned income. However, it does NOT reduce self-employment tax. An S-Corp election may or may not interact favorably depending on how your income is classified and sourced.
- State tax obligations: Even as an expat, your LLC or S-Corp may have ongoing state franchise tax obligations. Texas, for example, imposes a franchise tax on LLCs and corporations. Compliance cannot be ignored simply because you live abroad.
- Foreign bank account and entity reporting: If your U.S. entity has foreign financial accounts or interests, FBAR and FATCA reporting requirements apply regardless of entity type.
- You may be required to set up your business locally: In countries that don’t have a digital nomad visa or other scheme that permits you to maintain your business entity in the U.S., you may be required to set up a local business in order to be compliant with local tax law.
For expat business owners and entrepreneurs, we typically recommend a custom analysis before making any entity structure decisions. The tax and legal variables interact in ways that generic online advice simply does not account for.
Choosing an entity is an exercise in learning to ask your professional team the right questions
Instead of asking “LLC or S-Corp?”, the better question is: “Given my current income, my business goals, my ownership structure, and my long-term plans, what entity structure minimizes my total cost — taxes, compliance, and legal risk — on my personal time horizon?”
Seeking out a personalized answer for your situation is especially important for expat business owners who change locations often, or are open to doing so.
How Blue Haven Advisory supports international business owners
Blue Haven Advisory is a boutique advisory firm serving small business owners and U.S. expats with integrated tax, accounting, and commercial legal support. Our Business Formation Package includes entity selection analysis with tax projections, operating agreement drafting, and full setup support. Contact our team to request more information or send us an email describing your situation at [email protected].
FAQ
What is an operating agreement?
According to sba.gov, an operating agreement is “a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations and provisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the business owners.
Once the document is signed by the members of the limited liability company, it acts as an official contract binding them to its terms.” An operating agreement is the internal governing document for an LLC. It sets out how it is owned, how decisions get made, how profits & losses are allocated, and what happens if a member wants to leave or the business needs to wind down. Most states don’t require you to file it anywhere, but that shouldn’t make it optional in practice. Without one, the LLC defaults to the state’s generic statutory rules, which do not always reflect what the owners actually intended. If there is more than one member, this document protects everyone when expectations diverge.
Is my LLC an S-Corp, C-Corp, or Partnership?
By default, an LLC is none of these for federal tax purposes. It’s a disregarded entity if you’re the sole owner or treated as a partnership if there are multiple owners. An LLC only becomes an S or C-corp if an election is filed with the IRS to be taxed that way. The LLC itself remains an LLC at the state level either way; the election only changes how it’s taxed. So if a Form 2553 (for S-corps) or Form 8832 (for C-corps) is not filed, then the LLC is taxed under its default classification.
Is LLC or S-Corp better for real estate?
For most rental real estate, holding the property in a standard LLC, taxed as a disregarded entity or partnership, tends to work better than an S-Corp election. The S-Corp structure is built around generating reasonable wages for active owner-employees, which doesn’t necessarily work well with passive rental income. There are also restrictions on distributing appreciated property out of an S-Corp without triggering gain, which can complicate things later if you ever want to sell or transfer the property. That said, this depends heavily on the specific situation, the nature of the income, how active you are in managing the properties, and your broader tax picture, so it’s worth working through with an advisor before deciding.
You might also like: U.S. Tax Implications of Owning Real Estate in Jamaica
Should I start an LLC or an S-Corp in California?
This depends on what the business does and how it generates income. As a starting point, the LLC is the more flexible entity and is often the default choice, especially for real estate or passive income situations. The S-Corp election can make sense once a business is generating enough active, ordinary income that the self-employment tax savings outweigh the added payroll and compliance complexity. California also layers on its own annual LLC fee and franchise tax considerations that are worth factoring in either way. But, this really depends on the specific circumstances, so it’s not a one-size-fits-all answer.
Should my holding company be an LLC or an S-Corp?
Holding companies are typically structured as LLCs rather than S-Corps. The flexibility of an LLC works well for a structure whose main job is owning interests in other entities or assets, since there isn’t necessarily active business income that would benefit from the S-Corp wage/distribution split. That said, the right structure depends on what the holding company actually holds and how income flows through it, so this is worth evaluating based on your specific circumstances.
Should property rental be LLC or an S-Corp?
In most cases, rental property is better held in an LLC rather than an S-Corp. Rental income is generally passive, and the S-Corp structure is designed around active income and reasonable employee compensation, which doesn’t fit well with a rental property. The S-Corp’s restrictions on distributing appreciated assets can also create complications down the road if the property is ever sold or transferred. As always, the right answer depends on your specific circumstances, so it’s worth a conversation before deciding.
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