Open an LLC, or stay self-employed?

The question almost always arrives the same way: "I heard that if I open an LLC I pay less tax." It's worth separating what actually changes from what doesn't.

What does NOT change

To the IRS, a single-member LLC is by default a disregarded entity — separate from its owner only on paper. The income is reported on your personal return exactly as it would be if the company didn't exist.

Put plainly: forming the LLC and doing nothing else does not by itself lower your federal income tax. That's the most expensive misunderstanding we run into.

What does change

• You can invoice and open a bank account in the business name rather than your own.
• With two or more members, the IRS classifies it as a partnership by default and it files its own return with a K-1 for each partner.
• You can elect corporate treatment by filing Form 8832, or request S-Corp treatment.
• Even when it's disregarded for income tax, it remains a separate entity for employment taxes and certain excise taxes.

Where the savings come from when they exist

The savings people have heard about don't come from the LLC. They come from electing S-Corp treatment. In that structure the owner pays themselves a reasonable salary and the remaining profit isn't subject to self-employment tax. In exchange, new obligations appear — formal payroll, a separate business return — and those cost money and time.

How we work through it with a client

1. We look at your real net profit from last year, not revenue.
2. We estimate what a reasonable salary from the company would be.
3. We compare today's self-employment tax against the full cost of running an S-Corp.
4. If the difference isn't clear, the recommendation is to wait — the structure can be changed later.