LLC or Small Business?

Deductions, Write-Offs, Pass-Through Taxation, and S-Corp Benefits Explained

Starting a small business is exciting—but once money starts moving, taxes quickly become part of the conversation. One of the biggest decisions business owners face is how their business is structured for tax purposes. Limited Liability Companies (LLCs), sole proprietorships, partnerships, and S-corporations all offer different tax advantages, especially when it comes to deductions, write-offs, and pass-through taxation.

This article explains how these concepts work and when S-corp status might be beneficial for a small business.

Understanding Small Business Structures (Quick Overview)

Before diving into deductions and taxes, it helps to understand the most common business structures:

• Sole Proprietorship – A single owner business with no legal separation between owner and business.

• Partnership – Two or more owners sharing profits, losses, and responsibilities.

• LLC (Limited Liability Company) – A flexible structure offering liability protection with multiple tax options.

• S-Corporation (S-Corp) – A tax designation that can reduce self-employment taxes under certain conditions.

An LLC is unique because it can be taxed as a sole proprietorship, partnership, or S-corporation, depending on elections made with the IRS.

Small Business Deductions and Write-Offs

What Are Deductions and Write-Offs?

A tax deduction (often called a write-off) is an expense you subtract from your business income to reduce taxable profit. Lower taxable profit means lower taxes.

To qualify, expenses must generally be:

• Ordinary – Common in your industry

• Necessary – Helpful for running your business

Common Small Business Deductions

Most small businesses—whether LLCs or S-corps—can deduct many of the same expenses, including:

• Office rent or home office expenses

• Business supplies and equipment

• Internet and phone bills (business portion)

• Advertising and marketing

• Software subscriptions

• Professional services (accountants, lawyers)

• Insurance premiums

• Business travel and meals (subject to limits)

• Vehicle expenses (actual expenses or mileage)

These deductions directly reduce taxable income, making them one of the most powerful tax tools for business owners.

Home Office Deduction

If you use part of your home regularly and exclusively for business, you may qualify for the home office deduction. This applies to LLCs, sole proprietors, and S-corp owners (with specific rules).

You can deduct a portion of:

• Rent or mortgage interest

• Utilities

• Repairs and maintenance

• Property taxes

Pass-Through Taxation Explained

What Is Pass-Through Taxation?

Pass-through taxation means the business itself does not pay federal income tax. Instead, profits “pass through” to the owner(s), who report the income on their personal tax returns.

This avoids double taxation, which occurs when a corporation pays taxes on profits and shareholders pay taxes again on dividends.

Which Businesses Use Pass-Through Taxation?

• Sole proprietorships

• Partnerships

• Most LLCs

• S-corporations

LLCs are automatically treated as pass-through entities unless they elect otherwise.

How Pass-Through Taxation Works for LLCs

• Single-member LLC: Profits are reported on the owner’s personal return (similar to a sole proprietorship).

• Multi-member LLC: Profits are split among owners and reported individually.

Owners pay:

• Federal income tax

• State income tax (if applicable)

• Self-employment tax (Social Security and Medicare)

This is where S-corp status can make a big difference.

The Self-Employment Tax Challenge

For many LLC owners, the biggest tax burden isn’t income tax—it’s self-employment tax, which covers Social Security and Medicare.

• Current rate: 15.3%

• Applies to all net business profits for most LLC owners

If your business earns $80,000 in profit, the entire amount may be subject to self-employment tax—on top of income tax.

S-Corporation Benefits for Small Businesses

What Is an S-Corporation?

An S-corporation is not a business type—it’s a tax election. An LLC or corporation can choose to be taxed as an S-corp if it meets IRS requirements.

Key Tax Advantage: Salary vs. Distributions

S-corp owners must:

• Pay themselves a reasonable salary

• Take remaining profits as distributions

Here’s the advantage:

• Salary → subject to payroll taxes

• Distributions → NOT subject to self-employment tax

This can result in significant tax savings.

Example: LLC vs. S-Corp Tax Savings

LLC (no S-corp election):

• Profit: $100,000

• Self-employment tax applies to full amount

LLC taxed as S-corp:

• Salary: $60,000 (subject to payroll tax)

• Distribution: $40,000 (not subject to SE tax)

That $40,000 avoids the 15.3% self-employment tax, potentially saving thousands.

Other Benefits of S-Corp Status

• Lower self-employment taxes

• Still benefits from pass-through taxation

• Professional credibility

• Possible Qualified Business Income (QBI) deduction eligibility

Downsides of S-Corporations

S-corp benefits come with added responsibility and cost:

• Payroll setup and compliance

• Additional tax filings

• Requirement to pay a reasonable salary

• Less flexibility in ownership structure

• Higher accounting and bookkeeping costs

For small or low-profit businesses, the savings may not outweigh the complexity.

When Does S-Corp Status Make Sense?

S-corp taxation is often beneficial when:

• The business consistently earns $40,000–$50,000+ in profit

• The owner is actively working in the business

• The business can support payroll expenses

• The owner wants to reduce self-employment taxes

For newer or lower-income businesses, a standard LLC tax structure is often simpler and more cost-effective.

LLC Flexibility: A Major Advantage

One of the biggest strengths of an LLC is flexibility:

• Start as a simple pass-through entity

• Take standard deductions and write-offs

• Elect S-corp taxation later as profits grow

This allows business owners to scale their tax strategy as their income increases.

Final Thoughts

Choosing between an LLC and S-corp taxation isn’t about picking the “best” structure—it’s about choosing what fits your business right now.

• Deductions and write-offs reduce taxable income

• Pass-through taxation avoids double taxation

• S-corp status can lower self-employment taxes for profitable businesses

• LLCs offer flexibility to adapt as your business grows

Understanding how these pieces work together empowers small business owners to keep more of what they earn while staying compliant. When profits rise and tax complexity increases, working with a qualified tax professional can help ensure you’re using the right structure at the right time.