Fact Checked by Editorial Staff 
When you plan to start a business in any state across the United States of America, you must consider the structure of the business. For an aspiring entrepreneur, having a Limited Liability Company (LLC) or an S Corporation (S-Corp) can be the best idea, as neither of them goes through a complex filing process. Both offer similar advantages, like pass-through taxation and liability protection; however, they have a few structural differences as well.
Choosing between the structures certainly affects your taxes, personal liability, and long-term growth of the company. Hence, LLCBuddy editors come up with this guide on LLC vs S Corp. We’ll break down the differences, advantages, and disadvantages of each to help you make a profitable decision. Before we go deeper into the comparison matrices between ‘who is better: LLC or S Corp’, let’s have a look at each structure and its pros and cons.
What is an LLC?
A Limited Liability Company (LLC) is a flexible business structure that combines elements of corporations and partnerships. It provides personal liability protection while maintaining relatively simple formation and compliance requirements. Filing an LLC is much easier than starting a corporation or a partnership. It is less complicated and cost-effective to start an LLC.
Key Features
- Pass-Through Taxation – Business profits and losses are reported on the owner’s personal tax return.
- Limited Liability – Owners (called “members”) are not personally responsible for business debts.
- Flexibility – LLCs can have a single owner or multiple members.
| Pros | Cons |
|---|---|
| Simple and affordable formation | Subject to self-employment taxes on all profits |
| Fewer compliance requirements than corporations | Less attractive to outside investors compared to corporations |
| Flexible ownership and profit-sharing arrangements |
What is an S-Corp?
An S-Corp or S Corporation is not a separate legal entity or a business structure. It is a tax election made with the IRS. Both LLCs and corporations can elect to be taxed as S-Corps. The main advantage is potential savings on self-employment taxes.
Key Features
- Pass-Through Taxation – Profits and losses flow directly to shareholders’ personal tax returns.
- Ownership Restrictions – Limited to 100 shareholders, all of whom must be U.S. citizens or residents.
- Operational Formalities – Must adopt bylaws, hold annual meetings, and record corporate minutes.
| Pros | Cons |
|---|---|
| Liability protection similar to LLCs | Stricter IRS rules and eligibility criteria |
| Ability to save on self-employment taxes | More paperwork and compliance requirements |
| Increased credibility with investors and banks | Limited ownership flexibility |
LLC vs S-Corp: Key Differences
In the above section, we briefly explained what an LLC and an S-Corp are and how they work. Basically, when you file an LLC, you will get an option to choose the tax structure for your company. If you choose an S-Corp, then it will be taxed as an S-Corp. As mentioned earlier, it can be done while filing a corporation, too. In the next section, we will firmly discuss how LLCs and S-Corps are similar or different.
Formation and Structure
- LLC Formation – Requires filing Formation Certificates (commonly known as Certificate of Formation and Articles of Organization) with the state where you are going to start your business. An Operating Agreement is recommended but not always mandatory. Check with the State Secretary of State office if having an operating agreement is mandatory or not.
- S-Corp Formation – The S-Corp structure can be chosen right after you file your LLC. First, form an LLC and submit the Form 8832 to the Internal Revenue Service (IRS). It means that you prefer to tax your LLC as a corporation. Afterwards, file Form 2553 to elect S-Corp status.
LLC Advantage: Easier setup with less paperwork.
S-Corp Advantage: Access to tax benefits once established.
Taxation
LLC Taxation: There are two types of LLCs, single-member and multi-member LLCs. Both of them get the benefits of a pass-through taxation. The single-member LLC is treated as a “disregarded entity.” For both structures, the profits and losses of the company pass through to the members’ personal income tax return.
S-Corp Taxation: Most LLC owners choose S-corporation taxation to reduce their self-employment taxes. This is because if you own an S corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. The distribution of shares defines S-Corporation shareholders in terms of their corporate income.
Example: Consider the scenario where you are the only owner of an LLC in any state with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as an S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.
Ownership Rules and Liability Protection
Both LLCs and S-Corps shield owners from personal liability for business debts and lawsuits. In most cases, protection is similar. Liability protection is not a deciding factor since both structures offer it.
LLCs can have unlimited members, can include individuals, corporations, foreign owners, and other LLCs as owners. An S-Corp can add a maximum of 100 shareholders; only U.S. citizens or residents are allowed. Cannot be owned by corporations or partnerships.
Advantage: LLCs have greater ownership flexibility. Whereas, for an S-Corp, it works best for small, U.S.-based businesses.
Management and Operations
LLCs follow two structures when it comes to management. It can be member-managed or manager-managed. For both structures, the internal management is flexible. On the other hand, for an S-Corp, the management rules are stricter. It requires directors, officers, and shareholder meetings. Complicated compared to the LLC internal structure.
Advantage: LLC has informal and easier day-to-day management. While with an S-Corp, formality may occur for larger businesses or investors. Besides, for a single-member LLC, the management is pretty simple, whereas for an S-Corp, it probably requires more than a simple managerial structure.
Compliance and Paperwork
LLCs do not usually have vast formalities. It has minimal compliance, such as annual reports (in some states), and fewer formalities. If it is a multi-member LLC, there might be a chance of having detailed paperwork compared to a single-member LLC.
For the S-Corp, on the other hand, they must issue stock, hold annual meetings, keep minutes, and follow corporate procedures. That leads to higher compliance costs compared to the cost of maintaining an LLC. LLCs have less administrative burden and less compliance cost compared to S-Corps.
Profit Distribution
In LLCs, the profit distribution usually follows the operating agreement. If there is no operating agreement, then it can be decided between the members, regardless of ownership percentage. On the contrary, for an S-Corp structure, the profit must be distributed strictly according to the ownership percentage and shares. Hence, in LLCs, there is more flexibility in allocating profits.
Tax Savings Potential of an S-Corp
One of the biggest advantages of an S-Corp is potential tax savings. By splitting income between salary and dividends, owners reduce the amount subject to self-employment taxes.
Example Calculation
- LLC owner earns $150,000 → entire amount subject to ~15.3% self-employment tax = $22,950.
- S-Corp owner takes $90,000 salary + $60,000 dividends → only salary taxed for Social Security/Medicare (~$13,770), dividends not subject to self-employment tax.
- Potential savings: $9,000+ annually.
Note: IRS requires “reasonable compensation,” so owners cannot take an unreasonably low salary just to minimize taxes.
Important Points to Consider: LLC vs S-Corp
When to Choose an LLC
- Small businesses and freelancers
- Owners who want simple compliance
- Businesses with foreign or corporate members
- Startups are not yet generating high profits
When to Choose an S-Corp
- Established businesses with steady profits ($60k+ annually)
- Owners who want to save on self-employment taxes
- Businesses with all U.S. owners
- Companies are ready to handle corporate compliance.
Converting an LLC to an S-Corp
- Many business owners start as an LLC, then elect S-Corp taxation as profits grow.
- File IRS Form 2553 within 75 days of the tax year or during the tax year preceding it.
- Consult a CPA to determine the right timing.
Common Misconceptions
- ‘An S-Corp is a separate entity.’ False. It’s a tax classification.
- ‘S-Corps always save money.’ Not true if profits are low.
- ‘LLCs don’t pay taxes.’ LLCs are taxed; it just depends on the classification chosen.
Quick Comparison Table: LLC vs S-Corp
| Feature | LLC | S-Corp |
|---|---|---|
| Liability Protection | Yes | Yes |
| Ownership | Unlimited, including foreigners | Max 100, U.S. only |
| Taxation | Default pass-through, can elect S-Corp or C-Corp | Pass-through, with salary + dividends |
| Compliance | Minimal | High (meetings, minutes, stock) |
| Profit Distribution | Flexible | Based on share ownership |
| Best For | Small, flexible businesses | Profitable businesses seeking tax savings |
FAQs
Yes, a single-member LLC can elect S-Corp taxation by filing IRS Form 2553.
Yes, but some states impose their own taxes (e.g., California’s franchise tax).
Yes, if registered under state rules.
No. It only makes sense if the business generates enough profit to benefit from dividend distributions.
Yes, many businesses start as LLCs and elect S-Corp status once profitable.
Conclusion
Both LLCs and S-Corps provide liability protection and pass-through taxation, but the right choice depends on your business goals, ownership structure, and profit levels.
- Choose an LLC if you want simplicity, flexibility, or foreign ownership options.
- Choose an S-Corp if you expect consistent profits and want to minimize self-employment taxes.
Ultimately, consulting a CPA or business attorney is the best way to decide which structure fits your needs. We recommend LegalZoom for any assistance. Not only do they have vast legal support for both personal and professional needs, but they also offer LLC formation at $0 (+ state filing fee) for US residents.