Ah, the whole “LLC vs. S-Corp” debate.
It sounds like you’re picking between two separate business types—but that’s not exactly how it works.
An LLC is a legal business structure, while an S-Corp is more about how your business gets taxed. And yes, an LLC can actually choose to be taxed as an S-Corp!
Confused yet? Bear with us.
In this article, we’re breaking it all down in plain English. By the end, you’ll have a clear idea of whether an LLC or S-Corp setup makes the most sense for your digital agency.
The Difference Between Agency LLC vs. S-Corp
An LLC is a legal business structure—it’s how your business is officially set up. An S-Corp, on the other hand, isn’t a business type at all. It’s a tax status that LLCs or corporations can choose. Think of it like this: the LLC is the foundation, and the S-Corp is an optional tax layer you can add on top to change how your profits are taxed.
Here’s the key: before you can elect S-Corp status, you need to first have your business structured as either an LLC or a corporation.
What’s your business currently set up as? If you’re neither, this article might not fully apply yet, but feel free to keep reading—you’ll learn some tips that might come in handy when you’re ready to make a decision.
LLCs for Marketing Agencies
LLCs are a popular choice for digital agencies because they offer simplicity and flexibility. They’re easy to set up and manage, and they come with key benefits like limited liability protection and straightforward tax filing options. For agencies that don’t elect S-Corp status, sticking with the default LLC setup can still provide plenty of advantages.
Flexibility in How You Run Things
One big reason agency owners love LLCs is the freedom they offer. Unlike corporations that require board meetings and loads of paperwork, LLCs skip all that hassle. This is perfect for small digital agencies that would rather focus on their clients than get bogged down in admin work.
LLCs also make it easier to bring in freelancers, subcontractors, or even investors without jumping through hoops.
Protecting Your Personal Assets
LLCs protect your personal finances from any business debts or legal issues, which is a huge step up from sole proprietorships. If something goes wrong, like a client issue or financial trouble, your personal savings and assets are generally off-limits.
But, this protection only works if you keep your personal and business finances separate. If you mix them or act unethically, you could lose that shield, leaving yourself personally responsible.
Easy Access to Funding
Marketing agencies grow fast, and that often means needing more money—for new hires, better tools, or scaling up operations. LLCs make it simple to add new members (like partners or investors) without the complexity of issuing stock like corporations do.
Meanwhile, S-Corps have limits, like allowing only 100 shareholders, which can make raising bigger funds tricky. If your agency plans to grow and bring in multiple investors, sticking with an LLC gives you more room to expand without hitting those restrictions.
What About The Cons?
While LLCs are flexible and easy to manage, they don’t offer the same tax-saving opportunities as an S-Corp. Owners of LLCs pay self-employment taxes on all profits, which can add up as your agency grows. Plus, depending on your state, LLCs may come with higher fees or additional taxes.
S-Corps for Marketing Agencies
You’ve likely heard that S-Corp status = tax breaks. And it’s true. But with those breaks come a few strings attached. S-Corps have stricter oversight and more reporting requirements, which makes sense given the tax savings you can get.
So, why might an S-Corp be a good fit for your agency? Let’s break down the perks:
Pass-through Taxation
An S-Corp is considered a pass-through entity, which means the agency itself doesn’t pay federal income taxes. Instead, the profits go directly to the owners, who report them on their personal tax returns. This setup avoids the double taxation that corporations face, where both the agency and the owners are taxed separately on the same income.
For many agency owners, double taxation can eat into their profits significantly. By choosing S-Corp status, you can avoid this extra layer of taxation, keeping more of the earnings in the hands of the owners.
Savings on Self-Employment Taxes
Here’s the big draw: S-Corp status can save you money on self-employment taxes. How? You get to split your income into two parts:
- A reasonable salary for yourself, which is subject to regular payroll taxes.
- Profit distributions, which aren’t subject to self-employment taxes.
This setup can lead to significant savings if your agency is earning well. But keep in mind—you have to pay yourself a “reasonable” salary as defined by the IRS, so it’s not just about minimizing taxes entirely.
What about the cons?
S-Corps come with more rules. You’re required to pay yourself a “reasonable” salary, which involves payroll taxes and additional reporting. There’s also more paperwork to handle, and the IRS keeps a closer eye on S-Corps to ensure compliance. For agencies with lower revenue, the extra effort might not be worth the tax savings.
So, Which Is Better? Agency LLC vs. S-Corp
For a new marketing agency with modest revenue, an LLC is usually the way to go. It’s simple to set up, offers limited liability protection, and doesn’t require much in terms of compliance. This makes it a great fit for small teams or solo owners who need flexibility without the extra admin work.
However, if your agency is bringing in at least $100,000 in revenue and scaling quickly, it might be worth considering S-Corp status. The ability to split income between a salary and profit distributions can lead to significant savings on self-employment taxes. For agencies with steady growth and higher profits, the tax efficiency of an S-Corp can make a real difference to your bottom line.
Ultimately, it comes down to where your business is now and where you see it going.
Need Help Choosing Between LLC and S-Corp for Your Agency?
Figuring out whether to go with an LLC or S-Corp isn’t just about checking a box—it’s about setting your agency up for success long-term. The right choice can impact your taxes, your growth, and how smoothly your business runs.
That’s where we come in. At Agency CPAs, we help digital agencies make smarter financial decisions while handling their accounting, taxes, and business strategy.
If you’re on the look out for a better financial partner, let’s chat! Schedule a discovery call using the calendar below to book a call today.
Until next time!
