Here’s the quick answer: an LLC is a business structure, while an S-corp is a tax election—not a competing entity type. In Texas, most owners form an LLC first, then decide whether to elect S-corp tax treatment with the IRS. An LLC is simpler and cheaper to run. Electing S-corp status can save money on self-employment taxes once your profits are high enough (often around $60,000–$80,000+ in net profit) to justify running payroll and extra paperwork. Below, we break down the real differences so you can choose confidently.
This article is general information, not legal or tax advice. Every business is different—talk with a qualified tax professional before choosing or changing your tax structure.
LLC vs. S-corp: what’s the actual difference?
This trips up a lot of owners. An LLC (limited liability company) is a legal entity you create by filing with the Texas Secretary of State. An S-corp is a federal tax status you elect by filing IRS Form 2553.
Your Texas LLC can be taxed several ways:
- Default: a single-member LLC is taxed as a sole proprietorship; a multi-member LLC is taxed as a partnership.
- Elected: the LLC can elect to be taxed as an S-corp (or, less commonly, a C-corp).
So the real question isn’t “LLC or S-corp?”—it’s “Should my LLC be taxed as an S-corp?”
How is a default LLC taxed in Texas?
By default, an LLC is a pass-through entity: profits “pass through” to your personal tax return, and there’s no separate federal income tax at the business level. Texas has no state personal income tax, which is a bonus.
The catch: all of your net profit is subject to self-employment tax (15.3% for Social Security and Medicare) on top of regular income tax. On a $100,000 profit, that self-employment tax adds up quickly.
How does S-corp taxation save money?
With an S-corp election, you split your income into two buckets:
- A reasonable salary you pay yourself through payroll (subject to payroll/employment taxes).
- Remaining profit as a distribution, which is not subject to self-employment tax.
Example (illustrative only): Say your business nets $100,000. As a default LLC, all $100,000 faces self-employment tax. As an S-corp, you might pay yourself a $60,000 reasonable salary and take $40,000 as a distribution—so only the $60,000 salary is hit with employment taxes. That can translate into meaningful savings.
Important guardrail: the IRS requires your salary to be “reasonable” for the work you do. Paying yourself an artificially low salary to dodge taxes is a red flag for audits.
What does an S-corp cost and require?
S-corp savings aren’t free. Expect added complexity:
- Run payroll for yourself (payroll service fees, tax filings, W-2).
- File a separate business tax return (Form 1120-S) each year, usually with a CPA.
- Keep cleaner books and maintain a reasonable-compensation analysis.
- Bookkeeping and accounting costs typically rise.
These ongoing costs are why S-corp status usually only pays off once profits are consistently high enough for the tax savings to exceed the extra expense.
When does an LLC make the most sense?
Stick with a default LLC (no S-corp election) when:
- Your business is new or profits are modest/inconsistent.
- You want the simplest possible filing and lowest overhead.
- You reinvest most earnings back into the business.
- You don’t want to run payroll yet.
When should you elect S-corp status in Texas?
Consider the S-corp election when:
- Your net profit is consistently in the ~$60,000–$80,000+ range (a common rule-of-thumb starting point—your actual break-even depends on your salary and costs).
- You can pay yourself a genuine reasonable salary.
- You’re ready for payroll and a separate tax return.
- The projected self-employment tax savings comfortably exceed the added payroll and accounting costs.
A tax professional can run the numbers for your specific situation before you file Form 2553.
Do LLCs and S-corps pay Texas franchise tax?
Yes—both are generally subject to the Texas franchise tax and file with the Texas Comptroller. For 2026, businesses at or below the $2.65 million no-tax-due threshold owe no franchise tax, though many still file an informational report. The franchise tax applies regardless of whether you elect S-corp status, so it usually isn’t the deciding factor. See our guide, Texas Franchise Tax Explained for Small Business Owners.
Quick comparison table
| Feature | Default LLC | LLC with S-corp election |
|---|---|---|
| What it is | Legal entity | Tax election on top of the LLC |
| Federal income tax | Pass-through | Pass-through |
| Self-employment tax | On all net profit | Only on your salary |
| Payroll required | No | Yes (reasonable salary) |
| Tax return | Schedule C or 1065 | Form 1120-S |
| Best for | New/lower-profit businesses | Higher, steady profits |
| Complexity/cost | Lower | Higher |
Frequently Asked Questions
Is an S-corp better than an LLC in Texas?
Neither is universally “better.” An LLC is simpler and cheaper; an S-corp election can reduce self-employment taxes once profits are high enough to offset payroll and accounting costs. Many Texas owners form an LLC first, then elect S-corp status later.
Can a single-member LLC elect S-corp status in Texas?
Yes. A single-member LLC can elect S-corp taxation by filing IRS Form 2553, provided it meets eligibility rules. You’ll then need to run payroll and pay yourself a reasonable salary.
How much profit do I need to justify an S-corp?
A common starting point is around $60,000–$80,000 in consistent net profit, but the real break-even depends on your reasonable salary and added costs. A tax pro can calculate it for your business.
Do S-corps still pay Texas franchise tax?
Yes. Both LLCs and S-corps are generally subject to Texas franchise tax. For 2026, those at or below the $2.65 million threshold owe no tax but may still need to file an informational report.
When is the deadline to elect S-corp status?
Generally, Form 2553 must be filed within 2 months and 15 days of the start of the tax year you want the election to take effect (late-election relief may be available). Confirm timing with a tax professional.
Not sure which is right for you? Let’s run the numbers.
Choosing between a default LLC and an S-corp election comes down to your specific profit and payroll picture. VIP Choice Service offers bilingual (English/Spanish) guidance on entity structure, S-corp elections, payroll setup, and tax prep for DFW small businesses.
Call (972) 807-2217 or visit vipchoiceservice.com for a free bilingual consultation. Office: 9550 Forest Lane, Suite 440, Dallas, TX 75243.
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