LLC vs. S corp for a home service business

Two different questions, often confused

"Should I be an LLC or an S corp?" mixes two separate decisions. The first is legal: what entity owns the business and its trucks, contracts and debts? A limited liability company is formed under state law and separates business obligations from your personal assets. The second is tax: how does the IRS tax the profit? An S corporation is a tax status that passes income, losses, deductions and credits through to the owners, who report them on their personal returns^[1].

A single-member LLC, by default, is treated as disregarded from its owner for income tax, and its activity goes on the owner's own return, such as Schedule C^[2]. The LLC can instead elect to be treated as a corporation^[2], and an eligible corporation can elect S status with Form 2553, signed by all shareholders^[1]. That is how a plumber, roofer or cleaning company owner can be "an LLC taxed as an S corp."

How the options compare

Self-employment tax is the usual reason to switch

The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare, owed once net earnings reach $400^[3]. In 2026 the Social Security part applies to the first $184,500 of combined wages and self-employment earnings; the Medicare part has no cap^[3]. A sole proprietor or default LLC owner pays it on all net earnings from the business.

In an S corporation, an owner who works in the business is paid a salary through payroll, and Social Security and Medicare taxes apply to that salary. Profit paid out as distributions beyond the salary is not wages. The IRS expects the salary to be reasonable for the work the owner does, so you cannot pay yourself a token salary and take everything else as distributions. Ask your CPA how they set reasonable pay for a working owner in your trade.

Example: a fictional HVAC owner nets $90,000 a year as a single-member LLC. At 15.3%, self-employment tax on that profit is roughly $13,770 before the adjustments a CPA will apply. If the business elects S status and pays the owner a $60,000 salary, payroll taxes on the salary are about $9,180, and the remaining $30,000 comes out as distributions. The rough saving of about $4,600 has to cover payroll service costs, a separate tax return and any state fees. At $50,000 of profit, the same math often leaves little or nothing after those costs.

Rules that come with S status

• No more than 100 shareholders^[1].
• Only one class of stock, so profits must be split in proportion to ownership^[1].
• Only allowable shareholders: individuals, certain trusts and estates; partnerships, corporations and nonresident aliens cannot own shares^[1].
• The election must be signed by all shareholders^[1].

The one-class-of-stock rule matters for partners. If two owners want to split profit 70/30 one year and 50/50 the next, an S corp makes that hard. Partnerships taxed under the default LLC rules for multi-member LLCs allow more flexible allocations; ask your CPA to compare.

What changes the month after an S election

Owners who elect S status without preparing often spend the first quarter fixing paperwork. The election changes how you get paid, so the routine changes too:

• You become an employee of your own company. Your salary runs through payroll with withholding, just like your techs.
• Payroll tax deposits and quarterly payroll returns now include you, and you receive a W-2 at year end.
• Owner draws become distributions, which should be taken in proportion to ownership if there is more than one owner.
• Health insurance and retirement contributions for the owner may be handled differently; ask your CPA before the first payroll.
• The business files its own federal return, and each owner receives a statement of their share of income to put on their personal return.

None of this is hard once it is set up, but it is a monthly habit. If your bookkeeping is still a shoebox of receipts, fix that first; an S election on top of messy books usually costs more in accounting fees than it saves in tax.

Two or more owners

Many home service companies start as two partners: a tech and a salesperson, or two techs who leave the same employer. A multi-member LLC is taxed as a partnership by default, which allows the owners to agree on how profit is shared and to change that agreement in writing. An S corporation splits profit strictly by share ownership because it can have only one class of stock^[1].

Whatever structure you choose, write an operating agreement that answers the uncomfortable questions now: who decides on big purchases, how a partner is paid out if they leave, what happens if one owner stops working in the business and how disputes are settled. The agreement matters more to partners than the tax election does.

Liability protection has limits

An LLC protects your house and savings from business debts and many claims against the company, but it does not protect you from your own negligence on a job, and lenders often ask owners to sign personal guarantees anyway. Insurance is your first line of defense: general liability, commercial auto and workers' compensation where required. Keep the LLC's protection intact by using a separate bank account, signing contracts in the company's name and never paying personal bills from the business account.

Decision criteria

1. 01

   Form the legal entity early

   If you have employees, a truck on the road or customers' homes to work in, an LLC is usually worth forming before the first job.

2. 02

   Wait for steady profit before electing S status

   Look at a full year of net profit. If it is not reliably above what a reasonable salary for your role would be, the election may cost more than it saves.

3. 03

   Count the extra costs

   Payroll software or a payroll service, a separate business tax return, state annual reports and any state entity taxes.

4. 04

   Think about partners and investors

   Plans to bring in a corporate investor or a non-US partner rule out S status.

5. 05

   Review every year

   Revisit the structure each fall with your CPA, before the year closes and before the election deadlines for the next year.

Why starting simple is reasonable

New businesses are fragile. Of private establishments opened in March 2015, 79.6% were still operating a year later, 50.2% after five years and 34.6% after ten^[4]. A structure that adds payroll and a second tax return in year one is overhead you may not need yet. Many trades also have huge numbers of owner-only firms: 178,663 plumbing and HVAC contractors and 159,693 electrical contractors had no paid employees in 2023^[5]. For most of them, a default LLC is the sensible starting point.

Questions to bring to your CPA

1. At my current profit, what would I save or lose with an S corp election after payroll and filing costs?
2. What salary would you consider reasonable for my role, and how do you document it?
3. What state taxes or fees apply to an LLC and to an S corp in my state?
4. If I add a partner next year, how does each structure handle that?
5. What are the election deadlines for the tax year I want it to start?

Entity choice is one step in the startup legal checklist. Once it is settled, sort out sales tax and, if you run larger trucks, the DOT rules for service vehicles.