Entity Setup
Entity Setup for Small Businesses: Choosing Between LLC vs. S Corporation in Light of the One, Big, Beautiful Bill
The 2025 OBBB law impacts how small businesses are taxed—here’s how to choose between LLC and S-Corp for tax savings and compliance.
By NomadicTax Research Team • 5-8 min read • April 19, 2026
## Overview: Why 2025’s One, Big, Beautiful Bill (OBBB) Matters
The OBBB introduced changes that affect how business deductions and entities are treated. These include:
- The ability to take full **first-year bonus depreciation** for qualifying business property bought and placed in service after **January 19, 2025**, instead of spreading depreciation over many years. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- Adjustment in thresholds and deductions that affect business structure decisions like LLC vs S-Corp. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## LLC vs S-Corporation: Key Differences
| Feature | LLC (Taxed as Sole Proprietor or Partnership) | S-Corporation Election |
|---|---|---|
| Self-employment taxes | Owners pay SE tax on all net income | Only salary is subject to payroll taxes, distributions are not—if reasonable salary set |
| Required formalities | Less rigid—operating agreement, fewer compliance requirements | Must file separate tax return (Form 1120S), issue K-1s, maintain payroll, etc. |
| IRS audit risk | Lower risk in simple LLC structure | Higher scrutiny on “reasonable salary” in S-Corps |
## How OBBB Bonus Depreciation Changes Affect Structure Choice
Because the law now allows businesses to deduct **100% of the cost** of most qualifying property in the year placed in service, LLCs can benefit immediately from major purchases. S-Corps can also use bonus depreciation—but since S-Corps have payroll obligations, the tax savings strategy may tilt more favorably if cash flow is strong.
### Example Scenario
Linda has an LLC doing consulting. In 2026 she buys $50,000 of 5-year business equipment.
- If LLC taxed as sole proprietor, all $50,000 (assuming qualifies) may be deducted in 2026 under bonus depreciation.
- If she elects S-Corp and pays herself reasonable salary (say $40,000) and receives the rest as distribution, the equipment deduction still applies—but her payroll taxes are only on the salary, not the distribution.
The S-Corp structure saves on SE taxes **if distributions exceed reasonable salary**, but triggers more compliance costs.
## Practical Steps to Decide
- Estimate your revenue and profit in 2026 and beyond. Large one-time purchases make bonus depreciation more valuable.
- Test whether an S-Corp’s payroll burden plus formal compliance cost is less than the savings in self employment taxes.
- Ensure you set a **reasonable salary** for S-Corp owners to avoid IRS penalties.
- Use projected cash flows to see if operating under LLC vs S-Corp will give you net present value savings.
## Compliance Risks and Best Practices
- Keep separate bank accounts and records whether choosing LLC or S-Corp.
- Maintain payroll compliance: S-Corps must run payroll and adhere to associated tax withholding and filings.
- Document decisions: for example, write in operating agreement or bylaws your compensation strategy.
- Consult a tax advisor when taking on large business asset purchases (to verify eligibility for bonus depreciation).
## Bottom Line
If you anticipate heavy investment in business assets, LLC with bonus depreciation is powerful. If your business generates consistent profits and you’re looking to minimize payroll taxes, an S-Corporation might be better despite more structure. Use models to compare both in your specific situation.