"I should form an LLC to save on taxes" is one of the most common things clients say before an entity conversation. It is also, by itself, wrong. An LLC is a legal structure. It gives you liability protection. By default, a single member LLC is taxed exactly like a sole proprietor.

The Myth to Put to Bed First

There is no tax savings for forming an LLC. What saves small business owners money in self-employment tax is an S corporation election, which is a separate decision and not automatic when you form an LLC.

Sole Proprietor

What it is. You, doing business under your own name or a DBA. No formation needed.

Taxes. Business income flows onto Schedule C of your personal return. You pay ordinary income tax plus 15.3% self-employment tax on your net profit.

Liability. Zero separation between you and the business. If the business gets sued, your personal assets are exposed.

Good for. Side income, low risk service work, people testing whether an idea has legs before committing to formation costs.

Single Member LLC

What it is. A Texas Limited Liability Company with one owner. Registered with the Secretary of State, with ongoing franchise tax filings after formation.

Taxes. Identical to sole proprietor by default. Schedule C, self-employment tax on net profit. No federal tax change.

Liability. Real separation between you and the business, if you actually respect it. Separate bank account, separate books, real contracts in the LLC's name.

Good for. Anyone with real liability exposure, which is most working businesses. The legal protection is the point, not a tax outcome.

The married couple wrinkle. An LLC owned jointly by a married couple is normally a multi-member LLC, which means a partnership return (Form 1065) every year. Texas is a community property state, so the IRS allows married couples who own an LLC together to elect qualified joint venture or disregarded entity treatment instead (Rev. Proc. 2002-69). That keeps the business on Schedule C of the 1040 and skips the partnership return entirely. Worth knowing before filing your first return.

S Corporation Election

What it is. Not an entity type. It is a federal tax election (Form 2553) that changes how your LLC or corporation is taxed. You stay an LLC with the state, but the IRS taxes you as an S corporation.

Taxes. You pay yourself a reasonable W-2 salary out of the business. Payroll taxes (the 15.3%) only apply to the salary portion, not to the remaining profit, which passes through as distributions taxed at ordinary rates. That is the savings.

Trade offs. You now run payroll. You file a separate business return (Form 1120-S) plus a K-1 to yourself. Bookkeeping has to be clean. You pay for payroll software, and probably a CPA. The IRS also watches S corp salaries closely for being unreasonably low.

The Math, Roughly

The S corporation election starts paying for itself somewhere around $60,000 of net profit per year, and scales from there. Below that, the added cost of payroll, a second tax return, and ongoing bookkeeping usually eats the savings.

As a rough feel:

  • $50k net profit. S corp election typically a wash or net negative.
  • $100k net profit. Real savings, often $3,000 to $6,000 a year after costs.
  • $200k net profit. Savings scale up, often $8,000 to $12,000 a year after costs.
  • Over $300k. Still worth it, but the marginal benefit slows because Social Security wage base caps out.

These are feel numbers, not a projection for any specific business. Your actual savings depends on reasonable salary, state payroll costs, health insurance setup, and retirement contributions.

Texas Specific Wrinkles

Texas does not have a personal income tax, so entity choice in Texas is about federal tax and liability, not state tax savings. What Texas does have is the franchise tax, which applies to LLCs and corporations but not sole proprietors or most general partnerships.

For a small business under $2.47M in revenue, the franchise tax is $0 but still requires a filing. That is a cost in time, not dollars, but worth knowing before you form an entity.

Where JEM CPA Can Help

Entity selection is one of the conversations JEM CPA has most often with new business owners. A consultation runs through your actual numbers, your liability exposure, and whether an S corporation election is worth the added administration for where you are right now.