Choosing the right business structure isn’t just a legal decision—it’s a tax decision that can affect your cash flow, compliance requirements, and long-term growth. For many small business owners in Arlington, VA, the question eventually comes down to this: should you stay an LLC, or should you elect S corporation status?
At first glance, the difference between an LLC and an S corporation can feel confusing. Both offer liability protection, both are common among small businesses, and both can be tax-efficient in the right situation. The key is understanding how they’re taxed, what obligations come with each option, and when making a change actually makes sense.
Let’s break it down in plain English so you can make an informed decision for your Virginia business.
Understanding the Basics: LLC vs S Corporation
An LLC, or limited liability company, is a legal business structure created at the state level. In Virginia, LLCs are popular because they’re flexible, relatively easy to maintain, and provide personal liability protection. By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership.
An S corporation is not a legal structure—it’s a tax election made with the IRS. Businesses elect S corporation status by filing IRS Form 2553. An LLC or corporation can choose to be taxed as an S corporation if it meets IRS requirements.
This distinction is important. Many Arlington business owners don’t “become” an S corporation in a legal sense. Instead, their LLC remains an LLC under Virginia law, but it is taxed as an S corporation at the federal level.
How LLCs Are Taxed in Virginia
By default, LLC income flows directly to the owner’s personal tax return. While this pass-through taxation avoids corporate income tax, it comes with one major downside: self-employment tax.
If you’re an LLC owner actively working in your business, all net profit is generally subject to self-employment tax, which includes Social Security and Medicare taxes. This can add up quickly as profits grow.
For Arlington-based service providers—consultants, real estate professionals, marketing firms, and other professionals—this is often the point where tax bills start to feel heavier each year. Virginia state income tax applies as well, layered on top of federal taxes.
LLCs are relatively simple to manage, but simplicity can come at a cost when profits reach a certain level.
How S Corporations Are Taxed
S corporations also use pass-through taxation, meaning the business itself typically does not pay federal income tax. Instead, income flows to shareholders and is reported on personal returns.
The key difference is how income is treated for payroll and self-employment taxes. In an S corporation, owner-employees must be paid a reasonable salary. That salary is subject to payroll taxes. Any remaining profit can be taken as a distribution, which is not subject to self-employment tax.
This structure is where potential tax savings come into play. By splitting income between salary and distributions, Arlington business owners may reduce overall payroll and self-employment tax exposure.
However, the IRS closely monitors reasonable compensation. Underpaying yourself to avoid payroll taxes can trigger audits and penalties. Proper planning and documentation are essential.
When an S Corporation Makes Sense
Electing S corporation status is not a one-size-fits-all solution. For many Arlington small businesses, timing matters more than structure alone.
In general, S corporations become beneficial once a business is consistently profitable. If profits are modest, the additional compliance costs—such as payroll processing, tax filings, and accounting—may outweigh the tax savings.
As profits increase, the tax savings often become more meaningful. This is especially true for owner-operated businesses where the owner plays an active role in daily operations.
Businesses with steady income, predictable expenses, and long-term growth plans tend to benefit the most from S corporation status.
Additional Responsibilities of an S Corporation
While tax savings are appealing, S corporations come with added responsibilities that LLC owners need to consider carefully.
You’ll be required to run payroll, file quarterly payroll tax returns, and issue W-2s. The business must also file an annual S corporation tax return using Form 1120-S, along with Schedule K-1s for each shareholder.
Recordkeeping must be tighter, and deadlines become more critical. Missing payroll filings or misclassifying income can create compliance issues quickly.
For Arlington business owners who prefer simplicity, these additional obligations can feel burdensome. That’s why many businesses wait until the numbers clearly justify the switch.
Virginia and Arlington-Specific Considerations
Virginia does not impose a separate corporate income tax on S corporations, which aligns well with the federal pass-through structure. However, state income tax still applies at the individual level.
In Arlington County, businesses may also be subject to the Business, Professional, and Occupational License (BPOL) tax. BPOL applies regardless of whether you operate as an LLC or an S corporation and is based on gross receipts rather than profit.
This means entity choice does not eliminate local tax obligations. However, proper classification and reporting can help ensure you’re not overpaying.
Understanding how federal, state, and local taxes interact is where local CPA guidance becomes especially valuable.
Key Differences at a Glance
Here’s a simplified comparison to help clarify how LLCs and S corporations differ in practice:
- Tax treatment: LLCs default to full self-employment tax on profits; S corporations allow salary plus distributions
- Payroll requirement: Not required for LLC owners; required for S corporation owners
- Compliance: LLCs are simpler; S corporations require more filings and recordkeeping
- Flexibility: LLCs offer more operational flexibility; S corporations have stricter IRS rules
- Tax planning opportunities: Limited with LLCs; expanded with S corporations when structured correctly
Common Mistakes Arlington Business Owners Make
One of the most common mistakes is electing S corporation status too early. New businesses often don’t generate enough profit to justify the added complexity.
Another mistake is failing to adjust compensation as the business grows. Reasonable salary must be reviewed regularly, especially as revenue increases.
Some business owners also overlook Virginia and local tax requirements, focusing only on federal savings. A comprehensive approach is essential.
Finally, many Arlington business owners make the switch without updating their bookkeeping systems. Clean, accurate books are critical for S corporation compliance and audit protection.
How a CPA Helps You Decide
Choosing between an LLC and an S corporation should never be a guess. A CPA evaluates your income, expenses, growth trajectory, and personal tax situation before recommending a structure.
For Arlington businesses, a local CPA also considers Virginia tax rules, BPOL implications, and industry-specific factors. The goal is not just to reduce taxes this year, but to create a sustainable structure that supports long-term success.
A CPA can also handle the S corporation election, payroll setup, and ongoing compliance—removing the burden from business owners who want to focus on running their business.
Final Thoughts
There is no universally “better” choice between an LLC and an S corporation. The right answer depends on your numbers, your goals, and your tolerance for administrative complexity.
For many Arlington, VA business owners, staying an LLC makes sense early on. As profits grow, electing S corporation status can unlock meaningful tax savings—when done correctly and at the right time.
If you’re unsure whether it’s time to make the switch, a professional review can provide clarity and confidence. The cost of planning is often far less than the cost of getting it wrong.
