New Business Startups: How to Select the Right Entity for You - S Corp vs. LLC
Starting a new business in South Jersey is exciting, but before you make your first sale, you need to decide how your business will be structured. One of the most common questions new entrepreneurs ask is:
Should I form an LLC or elect S Corporation status? And which is better for taxes?
The truth is, both can work, however choosing the right entity can save you thousands in taxes and headaches down the road.
What Is an LLC?
A Limited Liability Company (LLC) is one of the simplest and most flexible ways to start a business.
Consider the following:
Easy to set up and maintain.
Offers liability protection (your personal assets are separate).
Profits and losses “pass through” to your personal tax return.
By default, profits are subject to self-employment tax (Social Security + Medicare).
May not be the most tax-efficient if you’re earning a high profit.
What Is an S Corporation?
An S Corp isn’t a separate type of entity, it’s a tax election that an LLC or corporation can make with the IRS.
Consider the following:
Owners can pay themselves a “reasonable salary” and take remaining profits as distributions, which are not subject to self-employment tax.
Can mean significant tax savings for profitable businesses.
Still offers liability protection.
More IRS rules and paperwork.
Must pay yourself a reasonable salary (can’t avoid payroll taxes completely).
Less flexibility than a standard LLC in how profits are divided.
S Corp vs. LLC: Which Is Better for Taxes?
LLC (Default Taxation):
All profit is taxed as self-employment income.
Simple if you’re just starting out and profits are modest.
S Corporation Election:
Part of your income is taxed as salary (subject to payroll tax).
The rest is taxed as a distribution (NOT subject to self-employment tax).
Potential tax savings once your net income exceeds ~$50,000–$75,000 (varies by state and situation).
Example:
Profit = $100,000
LLC (default) → Entire $100,000 subject to self-employment tax + income tax.
S Corp → Pay yourself $60,000 salary (taxed as wages). Remaining $40,000 taken as a distribution (no self-employment tax). Savings can be thousands of dollars.
Other Factors to Consider in New Jersey
State Taxes: NJ taxes S Corps differently than the federal government, so planning is important.
Payroll Requirements: S Corps require running payroll, filing W-2s, and additional reporting.
Future Growth: If you plan to reinvest profits or bring in partners, structure matters.
How to Decide What’s Best for You
Ask yourself:
What stage is my business in?
How much profit do I realistically expect?
Am I ready to handle payroll compliance (or hire a CPA to manage it)?
Do I need maximum flexibility now, or tax efficiency for growth?
Choosing between an LLC and an S Corp is one of the most important tax decisions you’ll make as a new business owner. There’s no one-size-fits-all answer, the “better” option depends on your income, goals, and long-term strategy.
At Ciaccia CPA, we advise South Jersey startups to select the right entity and set up their businesses for both protection and tax efficiency. Don’t guess - let’s find the structure that saves you the most and supports your growth.
