LLC vs. S-Corp in New Jersey: Which Entity Structure Is Right for Your Business?

One of the most common questions I hear from NJ business owners is whether they should operate as an LLC or elect S-Corp status. The answer depends on your revenue, how you pay yourself, and your long-term goals — and getting it wrong can cost you thousands every year.

What’s the Difference?

An LLC (Limited Liability Company) is a state-level business structure that provides liability protection. By default, a single-member LLC is taxed as a sole proprietorship, meaning all net income flows through to your personal return and is subject to self-employment tax at 15.3% on the first $168,600 (2025 threshold).

An S-Corp is a federal tax election, not a business structure. You can form an LLC in New Jersey and then elect S-Corp taxation by filing IRS Form 2553. The key benefit: as an S-Corp, you split your income between a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax).

When Does S-Corp Make Sense?

The S-Corp election generally becomes worthwhile when your net business income consistently exceeds $80,000–$100,000 per year. Below that threshold, the additional costs of payroll processing, separate tax returns, and compliance requirements often outweigh the self-employment tax savings.

For example, if your NJ business earns $150,000 net and you pay yourself a reasonable salary of $80,000, you save self-employment tax on the remaining $70,000 in distributions — roughly $10,700 in annual savings.

NJ-Specific Considerations

New Jersey imposes a minimum corporate business tax starting at $500 for S-Corps, and S-Corps must file a separate NJ CBT-100S return. LLCs taxed as sole proprietorships report business income on Schedule C with no separate state filing.

Additionally, NJ does not automatically follow the federal S-Corp election. You need to file a separate NJ election or ensure your federal election is properly recognized at the state level.

The Reasonable Compensation Requirement

If you elect S-Corp status, the IRS requires you to pay yourself a reasonable salary before taking distributions. Setting your salary too low is one of the most common triggers for an IRS audit of S-Corps.

Making the Right Choice

There’s no universal answer. I work with NJ business owners to model both scenarios using their actual numbers — comparing total federal and NJ tax liability under each structure, factoring in the additional compliance costs of an S-Corp.