LLC vs S-Corp
The tax-election decision that can save (or cost) you thousands a year. When S-corp makes sense for a party rental business, and when it doesn't.
By Blake Miller · Founder
Active party rental operator · Florida7 min read
First, clear up the confusion
"LLC" is a legal structure. "S-corp" is a tax election. You can have an LLC that's taxed as a sole proprietor, a partnership, an S-corp, or even a C-corp. Most party rental businesses start as a single-member LLC taxed as a sole prop, and later elect S-corp status when profit grows.
Why people elect S-corp
In a default LLC, every dollar of profit is hit with self-employment tax (~15.3%) on top of income tax. With an S-corp election, you split your profit into two buckets:
- Reasonable salary, paid to yourself via W-2, subject to payroll taxes.
- Owner distributions, what's left after salary, NOT subject to self-employment tax.
The savings come from the distribution portion. On $100,000 of profit, that can be $5,000 to $10,000 a year in saved self-employment tax.
When S-corp is probably worth it
- Net profit consistently above ~$50,000 to $80,000 (after all expenses, after paying yourself a fair wage).
- You're past the survival phase and have predictable cash flow.
- You can stomach running real payroll (Gusto, ADP, etc.) and quarterly filings.
- You'll stay in business for at least a few more years.
When S-corp is probably NOT worth it
- You're new and your profit is volatile or under ~$40,000.
- You don't want the overhead of payroll, separate corporate tax return (Form 1120-S), and stricter compliance.
- You're aggressively reinvesting in equipment using Section 179 and have low taxable income most years.
- You want to qualify for things that look at gross income (mortgages, certain credits), S-corp distributions can confuse lenders.
"Reasonable salary", the IRS landmine
Paying yourself $0 salary and taking $200,000 in distributions is the fastest way to get audited. The IRS expects S-corp owners to pay themselves a salary that reflects what someone in your role and market would earn, typically a meaningful percentage of your profit. Your CPA should help you set this and document the reasoning.
Other costs to factor in
- Payroll service: $40 to $100/month.
- Separate S-corp tax return (Form 1120-S): typically $800 to $2,000/year prepared by a CPA.
- State franchise / minimum corporate tax in some states (California, for example).
- Slightly higher bookkeeping complexity.
These costs can eat the savings if your profit isn't high enough, which is why the breakeven point really matters.
Educational only, not tax advice
This article is general information for party rental business owners. Tax law changes frequently, varies by state and entity type, and depends on your specific situation. Before making any decision based on what you read here, talk to a licensed CPA or tax professional who understands small business and equipment-heavy operations.