Quick Answer: Neither structure is universally better. According to the SBA, both LLCs and corporations provide liability protection with different tax implications. The right choice depends on your tax situation and growth plans. For restaurant owners and salon operators managing hourly teams, your decision impacts how you handle payroll for yourself versus your staff.
What's the Difference Between an LLC and a Corporation, and What Should You Consider?
If you're weighing LLC versus corporation and feeling overwhelmed by the jargon, here's what actually matters for how you'll run your business day-to-day.
- An LLC offers flexibility with fewer formalities. You can be member-managed or hire a manager. There are no mandatory annual meetings, no required board structure, and you can make decisions without formal resolutions. For a salon owner managing six stylists and a product order deadline, LLC flexibility means you're not scheduling a board meeting to hire a new receptionist.
- A corporation requires more structure: a board of directors, annual meetings, and formal resolutions for major decisions. The IRS treats corporations as separate tax entities from day one. S-Corporations require eligibility: maximum 100 U.S. citizen or resident shareholders, one stock class, and Form 2553 filed with the IRS.
- Both structures provide essentially identical personal liability protection when properly maintained. Your home and personal bank accounts are shielded from business debts and customer lawsuits. This protection requires keeping business and personal finances separate and filing annual reports on time.
Corporations are generally preferred if you plan to seek outside investors. For businesses with hourly teams, consider cash flow consistency. S-Corp owners must maintain reasonable W-2 salary payments year-round, which can create pressure during slow months. LLC owners can adjust their draws based on revenue fluctuations.
How Do Taxes Work Differently for LLCs and Corporations?
You're staring at Form 1065 versus Form 1120S, wondering which tax form will save you money while you've got a full dining room to manage. Here's what actually matters for your bottom line.
LLCs use pass-through taxation by default. Your business doesn't pay income tax; you do. Single-member LLCs report income on your personal Schedule C, and you pay 15.3% self-employment tax on ALL net profit. A restaurant owner with $100,000 profit pays roughly $15,300 in self-employment tax alone.
S-Corporations offer a way to reduce that burden. You pay yourself a "reasonable salary" subject to FICA taxes (Social Security and Medicare, 15.3%), but remaining profits taken as distributions aren't subject to employment tax. That same $100,000 profit split as $60,000 salary plus $40,000 distribution saves approximately $6,120 annually. The IRS requires this salary to reflect market rates.
C-Corps face double taxation: the corporation pays income tax on profits, then shareholders pay again on dividends.
Here's the catch: according to industry estimates, the S-Corp election adds $3,000–$8,000 in annual administrative costs. The math only works when net profit consistently exceeds $50,000–$60,000.
What Ongoing Costs and Administrative Requirements Should You Expect?
Formation fees are just the beginning—here's what you'll actually pay year after year to keep your business structure in good standing.
LLCs typically cost less to maintain. Annual state filing fees range from $50–$500 depending on your state. You'll file a single annual report, maintain an operating agreement, and keep basic financial records. Most states don't require publication or extensive documentation beyond tax filings.
Corporations require more ongoing investment. Beyond state filing fees, you'll need corporate minutes documenting board meetings, formal resolutions for significant decisions, and separate corporate tax returns (Form 1120 or Form 1120S). Professional accounting costs typically run higher because of additional compliance requirements. If you choose S-Corp status, factor in quarterly payroll processing and year-round W-2 salary payments, even during slow seasons.
Both structures benefit from professional guidance. A CPA can help you evaluate whether S-Corp tax savings justify the additional administrative burden for your specific profit levels and business model.
How Does Homebase Help with Payroll and Compliance?
Whether you choose LLC or S-Corp status, payroll compliance gets complicated fast. Homebase handles federal and state tax withholding automatically for your hourly teams. Our automated payroll system ensures accurate calculations every time.
Accurate time tracking and digital timesheets flow directly into payroll processing, eliminating manual work that bogs down service business owners.
Improve how you handle payroll compliance regardless of which business structure you select.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced IRS guidance on LLCs, S-Corporations, and corporation formation, SBA business structure guidelines, IRS Publication 15 for employer tax requirements, and Social Security Administration contribution limits for 2025.