S-corp vs LLC: which is better for a consultant?

What most people confuse: LLC is a legal container. S-corp is an IRS tax classification. A single-member LLC is taxed as a sole proprietor by default (Schedule C, full SE tax on all profit). That same LLC, after filing Form 2553, is taxed as an S-corp (W-2 salary plus distributions, FICA only on salary). The LLC operating agreement, liability protections, and state registration do not change. Only the tax treatment changes.

The sole-proprietor LLC math: $150K net profit taxed as a sole prop generates roughly $21,000 in SE tax. The same $150K through an LLC with S-corp election, paying a $60K W-2 salary, generates roughly $9,200 in FICA. The difference is roughly $11,800 per year, recurring every year.

The S-corp overhead: payroll service ($600 to $1,200/yr), separate 1120-S tax return ($1,500 to $2,500/yr), possible state franchise fees (varies widely by state). Total $2,000 to $3,500/yr. At $80K net profit with a $35K salary, gross SE tax savings is roughly $5,500. Net savings after overhead is $2,000 to $3,500. The election is marginal at $80K and clearly worthwhile at $120K and above.

Multi-member LLC: taxed as a partnership by default, which has different rules (Schedule K-1, Form 1065, no SE tax on guaranteed payments from the partnership if structured correctly). Multi-member LLC can also elect S-corp treatment, but all members must consent and the S-corp eligibility rules apply (no more than 100 shareholders, only US citizens or permanent residents, one class of stock). This is less common for consulting businesses.

State considerations: California imposes an $800 minimum franchise tax on LLCs plus a gross receipts fee above $250K. That changes the cost-benefit math. New York imposes its own LLC filing fee. Some states do not recognize single-member LLCs cleanly. The federal tax analysis is the same everywhere; state-level costs vary.