LLC, S corp or sole proprietor: when the entity actually starts to pay.

The entity question arrives at a predictable moment: the first year the tax bill is large enough to hurt. At that point somebody on a podcast says the words "S corp" and the search begins. The honest answer is that structure solves three separate problems (liability, privacy and self-employment tax), and that only the third one has a threshold. Get clear on which of the three you are actually trying to solve, and the choice makes itself.

Sole proprietor: the default nobody chooses

If you do nothing, you are a sole proprietor. You are the business. There is no filing, no annual fee, no separate return: profit goes on Schedule C, and self-employment tax applies to it.

The two costs are invisible until they are not. First, no liability separation: a claim arising from your content, a contract, or something a contractor did on your behalf reaches your personal assets. Second, no name separation: contracts, invoices, payment processors and any business licence carry your legal name. For a creator who works under a stage name, that is a real exposure and the most common reason to incorporate long before tax becomes the issue.

The LLC: liability and privacy, not tax

A single-member LLC is a state-law creature. Formed properly and kept separate, it puts a legal wall between the business and you. It also lets the business operate under its own name: the LLC signs contracts, holds the bank account, and appears where your name used to.

For federal tax it changes nothing by default. A single-member LLC is a disregarded entity: same Schedule C, same 15.3%. Anyone who tells you an LLC saves tax by itself is selling formation services.

What it does require:

• Keeping it separate. A dedicated bank account, no personal spending from it, a written operating agreement, and formalities observed. An LLC that is used as a personal wallet can have its protection disregarded (the "piercing the veil" argument), and then you have paid the fees for nothing.
• State choice with eyes open. You generally form where you live and operate. Forming in Wyoming while living and working in California usually means registering as a foreign LLC in California anyway, paying both sets of fees and California's franchise tax. The exception is a genuine privacy strategy, executed properly.
• Beneficial ownership reporting. Federal BOI reporting under the Corporate Transparency Act has been through litigation and rule changes; check the current position with your advisor when you form, because the answer has moved more than once.

The S corporation election: where the tax saving lives

An S corporation is not a type of company; it is a tax election. An LLC (or a corporation) files Form 2553 and is then taxed under subchapter S.

The mechanism is simple. Profit is split in two:

• a reasonable salary paid to you as an employee, which carries payroll tax: the same 15.3%, just collected differently;
• the remaining profit, distributed to you as an owner, which does not carry self-employment tax.

That second bucket is the whole saving. On $150,000 of profit with an $80,000 salary, roughly $70,000 escapes the 15.3%, which is about $10,000 a year. At $200,000 with the same salary, the saving is closer to $15,000–$18,000.

What it costs

Add the fact that an S corp must run actual payroll, on a schedule, with withholding remitted. It is not something you reconstruct in April.

Where the break-even really is

• Below ~$40,000 of net profit: almost never worth it. The fixed costs eat the saving.
• $40,000 – $75,000: marginal. Worth modelling, rarely worth doing on its own.
• $75,000 – $100,000 and above: this is where it starts to pay clearly, and the saving grows with profit.

Two things also weigh in the other direction, and get ignored: a lower salary means a lower Social Security earnings record, and it can reduce what you can contribute to a solo 401(k) or SEP. For a creator in a business with a short earnings window, that trade-off deserves a moment's thought rather than a reflex.

The reasonable salary problem

If an S corp gets challenged, it is almost always on this. The IRS's position is that a shareholder-employee who performs services must be paid reasonable compensation before distributions.

There is no formula in the code. What the IRS and the courts look at is: training and experience, duties and responsibilities, time devoted, what comparable businesses pay for similar services, and what the business could pay. The cases that go badly share a pattern: a token salary and a large distribution, with no reasoning behind the number.

The defence is documentation, prepared at the time and not after a letter arrives: comparable role data, an honest account of hours and duties, and a salary that a stranger doing your job would plausibly accept. A 60/40 or 50/50 salary-to-distribution split at moderate profit levels is defensible far more often than the aggressive splits that circulate online.

Agencies: a different question

Everything above is written for a creator taxed on their own profit. An OFM agency faces the structural question first and the tax one second.

An agency signs contracts with creators, engages chatters and managers, and moves third-party money. Operating that in a personal name means a contract dispute, a wage claim, or a creator's claim over unpaid income lands on the founder personally. A multi-member LLC or a corporation, with a written operating agreement, defined roles, and money that never mixes with anyone's personal account, is the baseline, not an optimisation.

If money belonging to creators passes through the agency's account before being paid on, that raises separate questions about how it is held and accounted for, and about state money-transmission rules in some configurations. It is worth structuring deliberately rather than discovering later.

In short

Form an LLC when you want liability separation or your name off the paperwork; that is a decision about risk, not about tax. Make the S election when net profit is consistently above roughly $75,000 and you are prepared to run real payroll. Set a reasonable salary and write down why. And if you run an agency rather than a creator account, treat the entity as a requirement rather than a tax play.

This guide is general information, not US legal or tax advice. We work with agencies and creators on contracts and structuring, alongside a CPA and, where the question is US-specific, US-qualified counsel.

Your contactOlivier MaciejewskiFounder of OFM Legal · Former international business lawyer (HEC Paris, Arendt, Clifford Chance) · Official MYM partnerHis background Updated August 6, 2026

This article is general information and does not replace advice tailored to your situation. OFM Legal is not a law firm: court proceedings are handled by our partner lawyers.

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