What is the difference between an LLC and an S-Corp?

An LLC (Limited Liability Company) is a legal entity structure that provides liability protection while allowing flexible taxation, defaulting to pass-through taxation like a sole proprietorship or partnership. An S-Corp is a tax election (not a separate legal structure) that can be made by either an LLC or a corporation. The key difference: an S-Corp requires the owner to pay themselves a 'reasonable salary' as a W-2 employee, which reduces self-employment tax on distributions. Both provide liability protection; the S-Corp election primarily provides potential tax savings once the business earns more than approximately $40,000-$50,000 in net profit.

Which business structure is best for getting a business loan?

For SBA loans and conventional bank loans, LLCs and S-Corps are treated similarly: lenders want to see separate business banking, organized financial records, and ideally 2+ years in business. Sole proprietors can qualify for SBA loans but may have a harder time demonstrating business-personal separation. C-Corps work for SBA loans but are uncommon for small businesses. For MCAs (merchant cash advances), lenders primarily look at bank deposit history; an LLC or sole proprietorship with strong revenue can qualify equally. The key factor isn't the structure; it's that business finances are clearly separated from personal finances.

Should I be an LLC or S-Corp for tax purposes?

The S-Corp tax election becomes advantageous when your business earns net profits above approximately $40,000-$50,000 per year. Below that threshold, the administrative cost (payroll, additional tax filings) typically exceeds the savings. With an S-Corp election, you split your income into: (1) a reasonable W-2 salary (subject to self-employment taxes) and (2) distributions (not subject to self-employment taxes). The tax savings on distributions can be substantial at higher income levels. Consult a CPA before making this election; reasonable salary requirements are enforced by the IRS.

Can a sole proprietor get a merchant cash advance?

Yes, sole proprietors can qualify for merchant cash advances. MCA underwriting is primarily based on bank deposit history (6 consecutive months of business bank statements showing consistent deposits) and a minimum personal FICO score (typically 500+). However, sole proprietors who comingle personal and business finances in the same bank account make it harder for underwriters to evaluate business revenue. A dedicated business checking account, even for a sole proprietor, significantly improves MCA qualification and approval amounts.

LLC vs S-Corp vs C-Corp

Legal and tax disclaimer: This guide provides general educational information about business structures. Business entity laws vary by state. Tax implications depend on your specific income level, industry, and circumstances. Consult an attorney and a CPA before forming a business entity or making a tax election.

The Four Business Structures at a Glance

Sole Proprietorship

Default status / no filing required

Simplest

LiabilityNo protection, personal assets at risk

TaxesPass-through; self-employment tax on all profit

PaperworkAlmost none

FundingHarder; personal and business often mixed

Best forTesting a side hustle; very low-revenue operations

LLC

Limited Liability Company

Side-by-Side Comparison

LLC vs S-Corp vs C-Corp: Which Is Best for Your Small Business? Comparison Table (2026)
Factor	Sole Prop	LLC	S-Corp	C-Corp
FORMATION & COMPLIANCE
Formation paperwork	None	Articles of Organization	LLC/Corp + IRS Form 2553	Articles of Incorporation
State filing fee	$0	$50 to $500	$50 to $500+ IRS filing	$50 to $500
Annual compliance	Minimal	Annual report	Payroll, annual report, Form 1120-S	Board minutes, bylaws, Form 1120
Personal liability protection	None	Yes	Yes	Yes
TAXATION
Federal tax structure	Pass-through (Schedule C)	Pass-through (Schedule C or K-1)	Pass-through (K-1; salary on W-2)	Corporate (21% flat) + dividend tax
Self-employment tax	On all profit (15.3%)	On all profit (15.3%)	On salary only, not distributions	Owner pays FICA as employee only
Double taxation risk	None	None	None	Yes: corp profit taxed, dividends taxed again
Qualified Business Income (QBI) deduction	Up to 20%	Up to 20%	Up to 20%	Not available
BUSINESS FUNDING
MCA / Working Capital Advance	Possible, but harder	Yes, preferred	Yes, preferred	Yes
SBA 7(a) loan eligibility	Yes, with EIN	Yes	Yes	Yes
Business credit building	Difficult	Good	Good	Excellent
Bank business checking account	Yes (with DBA)	Yes	Yes	Yes
Investor equity funding	Very difficult	Possible, limited	Yes, limited (100 shareholders max)	Yes: VC, angel, stock issuance

The S-Corp Tax Advantage: How the Math Works

The S-Corp tax election's key benefit is reducing self-employment (SE) tax. Here's a concrete example:

LLC (default / no S-Corp election)

Net business profit$120,000

Self-employment tax (15.3% on ~92.35%)($17,013)

SE tax deduction (half of SE tax)−$8,507

Taxable income (at 22% bracket)($24,530)

Total federal tax burden~$41,543

S-Corp Election (salary + distributions)

Net business profit$120,000

Reasonable W-2 salary (owner)$60,000

FICA on salary (15.3% shared)($9,180)

Distribution (remaining $60K)$60,000

No SE tax on distribution$0

Income tax on total (~22%)($20,570)

Total federal tax burden~$29,750

Estimated savings vs. LLC~$11,793

Illustration only. Actual tax liability depends on deductions, state taxes, payroll costs, and other factors. Consult a CPA for your specific situation. Reasonable salary requirements are enforced by the IRS; you cannot set salary to $1 to avoid FICA.

Cafe owner writing in a ring binder of paperwork beside her espresso grinder — The actual choice between business structures usually comes down to paperwork like this, not a single rule of thumb.

How Your Business Structure Affects Funding

Merchant Cash Advances (MCA)

MCA underwriting is primarily based on bank deposit history, not business structure. However, structure matters in two ways:

Separate bank account is critical: regardless of structure. Sole proprietors who deposit business revenue into personal accounts make MCA underwriting very difficult. Open a dedicated business checking account immediately, even as a sole proprietor.
EIN (Employer Identification Number) preferred: most MCA providers want a business EIN. Sole proprietors can use their SSN but this creates a direct link to personal credit. An LLC with a separate EIN is cleaner for MCA applications.

SBA 7(a) Loans

SBA 7(a) loans are available to all four structure types (with EIN). The structure affects two things:

Personal guarantee requirement: SBA 7(a) requires a personal guarantee from any owner holding 20%+ equity. This applies regardless of LLC or corporate structure; the liability protection of the entity doesn't protect you from the personal guarantee.
Financial statement preparation: LLCs and S-Corps filing as pass-through entities need business tax returns (Schedule C or Form 1120-S) plus personal tax returns. C-Corps need corporate returns (Form 1120) only, but the added complexity and double taxation rarely make C-Corp the right choice for small businesses seeking SBA loans.

Building Business Credit

To build a separate business credit profile (PAYDEX, Intelliscore, Equifax Business), you need:

A formal business entity with a name (LLC, Corp, or even DBA with EIN)
A DUNS number (free at dnb.com)
Trade references reporting to D&B or Experian Business

Sole proprietors cannot build truly separate business credit without a DBA and EIN. An LLC provides the cleanest foundation for business credit building.

Which Structure Should You Choose?

New business / testing a concept / under $20K revenue: Sole proprietorship to start, keep it simple. Open a separate bank account. Get an EIN. Convert to LLC once the business proves itself.
Established small business, ready for formalization: LLC. It's the sweet spot of protection, simplicity, and funding access for the vast majority of small businesses.
Profitable LLC earning $40K+ net annually: Consider the S-Corp election with your CPA. The tax savings can be significant at this income level, potentially $5K to $15K+ per year.
Seeking venture capital or angel investment, planning to offer equity to employees: C-Corp (typically Delaware). VCs strongly prefer C-Corps for the stock structure flexibility.

The #1 mistake: waiting too long to form an LLC Many small business owners operate as sole proprietors for years to "avoid paperwork." But every day they operate without an LLC, their personal assets (house, car, personal bank account) are fully exposed to business lawsuits, vendor disputes, and customer claims. In most states, forming an LLC costs $100 to $300 and takes one hour. The liability protection it provides is worth far more than the paperwork burden.

Frequently Asked Questions

What is the difference between an LLC and an S-Corp?: An LLC is a legal entity type (formation with your state). An S-Corp is an IRS tax election, not a separate legal structure. An LLC can elect to be taxed as an S-Corp by filing IRS Form 2553. The practical difference: an S-Corp requires the owner to receive a "reasonable salary" as a W-2 employee, with FICA taxes on that salary only, not on the remaining profit distributed. This can save significant self-employment taxes at higher income levels (generally above $40,000 to $50,000 in net profit).

Which business structure is best for getting a business loan?: LLCs and S-Corps are the most common and preferred structures for business lending. Both allow clear separation of business and personal finances, both have EINs, and both have recognizable legal structures that lenders are comfortable with. For MCAs specifically, the most important factor is having a dedicated business bank account, not the specific structure. For SBA loans, LLCs and S-Corps are equally well-positioned. C-Corps are fine for bank loans but add complexity. Sole proprietors can qualify for MCAs and SBA loans but should have a dedicated business bank account and EIN.

Should I be an LLC or S-Corp for tax purposes?: The S-Corp election starts making financial sense once your business consistently earns $40,000 to $50,000 or more in net profit annually. Below that, the cost of S-Corp compliance (running payroll, additional tax filings, accountant fees) typically exceeds the tax savings. Above $80,000 to $100,000 in net profit, the savings become substantial, potentially $8,000 to $15,000 per year. The exact crossover point depends on your reasonable salary amount, state taxes, and other deductions. Consult a CPA for a personalized analysis.

Can a sole proprietor get a merchant cash advance?: Yes. MCA underwriting is primarily based on bank deposit history and a minimum personal FICO score (typically 500+). Sole proprietors can qualify, but the key is having a dedicated business bank account where all business revenue is deposited. If business and personal deposits are mixed in the same account, underwriters cannot accurately assess business revenue, which typically results in lower advance amounts or denial. Opening a separate business checking account, even as a sole proprietor, significantly improves MCA approval odds and amounts.

LLC or S-Corp: T.A.G. funds both.

Merchant cash advances for any business structure. Review begins as soon as your file is complete. 500 FICO minimum. No collateral.

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LLC vs S-Corp vs C-Corp:Which Structure Is Right for You?