Kerry: Okay, Tom. I’ve got one for you that I hear from business owners all the time, and I’ll admit I’ve asked it myself in the past. Is it better to be an LLC or an S-Corp? And before you answer, I’m just going to guess… it depends?

Tom: That’s exactly right, and honestly, it’s kind of a trick question. But it’s also one I get asked constantly, especially from businesses that are starting to grow and wondering if their current structure still makes sense. The tricky part is that there are two different levels where your business structure comes into play. The state level and the federal level. Each one treats your business a little differently.

Kerry: So let’s break that down. What’s the first thing people should understand about the state level when it comes to business structure?

Tom: Great place to start. When we’re talking about the state level, this is usually where LLCs enter the picture. Most businesses begin as Sole Proprietorships (for individuals) or Partnerships (if there are two or more owners). But once a business grows or takes on a little more risk, such as hiring employees or opening a physical space, it’s normal to want a bit more protection between your business and your personal life. That’s why most people form an LLC. It gives you liability protection with relatively few hoops to jump through.

Kerry: What exactly does it take to form an LLC in Washington State?

Tom: It’s actually pretty simple. You’ll file an Initial Report with the Secretary of State, pay a small fee, and create an Operating Agreement for all members to sign and keep on file. You’ll also need to do a basic annual renewal. While there are some general meeting requirements, they’re minimal. You can definitely work with an attorney if you’d like help, but a savvy business owner with a good network can often handle this themselves.

And if you’ve got a brick and mortar location or employees, the time and cost to set up an LLC is absolutely worth it.

Kerry: Okay, so that’s the state level. What changes when we start talking about the federal level?

Tom: Here’s where that trick question comes into play. At the federal level, meaning the IRS, your business is taxed based on one of four structures: Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.

Notice something missing? Yes, LLCs aren’t on that list. That’s because the IRS doesn’t tax LLCs as a unique entity. Instead, they require you to choose one of those four structures for tax purposes. So while your state may recognize you as an LLC, the IRS needs you to pick a tax identity, and that’s where things get interesting.

Kerry: So let’s talk money. What’s the main tax consideration that makes people consider switching to an S-Corp?

Tom: Taxes. Specifically, self-employment taxes—that 15.3 percent that covers Medicare and Social Security. As a Sole Proprietor or Partner, you pay self-employment tax on all your net income. But if you file to become an S-Corporation, you can split your income. You’re required to pay yourself a reasonable salary (which is subject to that 15.3 percent), but any additional profit you take out as a distribution is not. That shift alone can save business owners thousands of dollars each year.

Kerry: That’s huge. So how does someone actually become an S-Corp with the IRS?

Tom: You file a short form, IRS Form 2553, and submit it by March 15 to make the election for that calendar year. It’s a simple process that either you or your accountant can usually handle. Of course, there are always exceptions and nuances, so I highly recommend talking with your CPA or tax advisor to decide what’s best for your situation.

Kerry: Alright, bring it home for us. If someone asks you LLC or S-Corp, what’s the real answer?

Tom: Most commonly, it’s both. The most typical structure I see is a business that’s an LLC at the state level and taxed as an S-Corp at the federal level. That setup gives you liability protection and the potential for real tax savings, which is a win-win for many small business owners.

Got a question you would love us to dig into? Submit to raymond.still@courierherald.com.

Kerry Solmonsen is the Executive Director of the Enumclaw Chamber of Commerce and community advocate with a passion for helping local businesses grow and thrive. With a background in leadership, sales, nonprofit development, and business development, she brings both heart and hustle to her work. Whether she’s organizing a parade, launching a community initiative, or championing small-town entrepreneurship, Kerry is all about connection, collaboration, and creating momentum that matters.

Thomas Sauvageau is a lifelong entrepreneur and seasoned business coach with a passion for helping small business owners succeed. Over the past 20+ years, he’s owned or partnered in more than 30 businesses across industries like finance, real estate, and hospitality, many of them right here in our community. While he’s no stranger to the highs and lows of entrepreneurship, Tom’s true calling is helping others grow thriving, values-driven companies. As a Certified EOS Implementer®, he now works with business owners across the region to bring structure, clarity, and momentum to their vision. www.eosworldwide.com/thomas-sauvageau