Sole Proprietor, LLC, or S-Corp: Choosing the Right Business Structure

The savings math at $120,000 net income:

But there's a catch: running an S-Corp costs money.

The S-Corp Tax: Administrative Costs

S-Corp status requires:

• Payroll service: $50-$150/month ($600-$1,800/year)
• Corporate tax return preparation: $1,000-$2,500/year (Form 1120-S is more complex than Schedule C)
• State annual report fees: $100-$800/year depending on the state
• Quarterly payroll tax filings: handled by your payroll service
• Reasonable salary documentation: your CPA needs to justify the salary you set

Total additional cost: approximately $2,000-$4,000/year

The Breakeven Point

The math is straightforward:

• If your net income is under $60,000, don't bother with S-Corp. The administrative costs eat your savings.
• If your net income is $60,000-$80,000, it's a gray area. The savings are modest after admin costs.
• If your net income consistently exceeds $80,000-$100,000, S-Corp election likely makes sense. At $120K, you're saving $2,000-$4,000 net after admin costs. At $150K, the savings are even bigger.

The "Reasonable Salary" Trap

The IRS requires S-Corp owner-employees to pay themselves a reasonable salary before taking distributions. You can't pay yourself $20,000 and take $100,000 in distributions — the IRS will reclassify those distributions as salary and assess back taxes plus penalties.

What's "reasonable"? The IRS looks at:

• What veterinarians with similar experience earn in your area
• How many hours you work
• Your duties and responsibilities
• Comparable salaries for relief vets in your market

For most relief vets, a reasonable salary falls in the range of 50-70% of net income. Your CPA should help you document this.

Red flags that trigger audits:

• Zero or minimal W-2 wages
• Distributions exceeding salary by more than 2:1
• Salary significantly below industry norms for your experience level

Decision Framework

Here's the simple version:

1. Day one: Start as a sole proprietor. Just work.
2. As soon as practical: Form an LLC (or PLLC) for liability protection. Cost is minimal.
3. When net income consistently exceeds $80K-$100K: Talk to a CPA about S-Corp election. File Form 2553 by March 15 for it to take effect that tax year.
4. When income exceeds $200K+: Your CPA may suggest more advanced strategies, but S-Corp remains the standard structure for most relief vets.

State-Specific Gotchas

• California charges a minimum $800/year franchise tax on LLCs AND an additional 1.5% tax on S-Corp net income
• New York has a filing fee based on gross income for LLCs
• Texas has a franchise tax for LLCs with revenue over $2.47 million (unlikely for an individual relief vet, but worth knowing)
• Some states don't recognize S-Corp elections at the state level

Always consult with a CPA who understands your state's specific rules before making an entity election.

The Bottom Line

Don't let anyone sell you on a complicated business structure before you need one. Start simple, form an LLC when you're ready for liability protection, and revisit S-Corp election when your income justifies the administrative overhead.

The right structure at the right time can save you thousands. The wrong structure at the wrong time just creates expensive paperwork.