S Corp vs. LLC: Which Is Right for Your Business?
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An LLC (limited liability company) is a legal business structure you set up with your state. An S corp (S corporation) isn't a structure at all — it's a tax election an LLC or corporation can make with the IRS.
That's why it isn't really "either/or." Most small businesses form an LLC first, then elect S-corp taxation once profits grow enough to make the extra payroll and paperwork worth the self-employment tax savings. Both give you limited liability protection — the difference is how you're taxed.
S corp vs. LLC at a glance
Feature | LLC | S Corp |
|---|---|---|
What it is | A legal business structure you form with your state. | A federal tax election an LLC or corporation can make. |
How it's taxed | • Pass-through by default • Single-member: Schedule C; multi-member: Form 1065 | • Pass-through, split into salary + distributions • Files its own return on Form 1120-S |
Self-employment tax | • Paid on all net profit (about 15.3%) | • Paid only on your salary • Distributions avoid self-employment tax |
Paying yourself | • Take owner draws anytime • No payroll required | • Must run payroll • Pay yourself a reasonable salary |
Liability protection | • Yes — separates personal & business assets | • Yes — same protection as an LLC |
Setup & cost | • Low cost, quick state filing • Minimal ongoing upkeep | • Higher cost • Payroll setup + often an accountant |
Ongoing paperwork | • Light — usually an annual state report | • Payroll tax filings • Form 1120-S + Schedule K-1s • Separate books & records |
Best for | • New, side, or lower-profit businesses | • Profitable businesses that can pay an owner salary and still take distributions |
How to choose
The right choice usually comes down to how much profit your business makes and whether you can pay yourself a reasonable salary.
Just starting out, running a side business, or lower profit: an LLC is usually simpler and cheaper.
Net profit consistently above ~$40–50K after paying yourself a reasonable salary: an S-corp election may cut self-employment tax.
Want the fewest filings and no payroll: stay an LLC taxed as a sole proprietor or partnership.
Comfortable running payroll and filing a separate business return: an S corp can pay off.
Not sure yet? Many owners start as an LLC and elect S-corp status later as profits grow. A tax professional can run the numbers for your specific situation.
How the S corp election works
How electing S corp status lowers self-employment tax, what the IRS “reasonable salary” rule means, and how to file Form 2553 to switch from an LLC.
How S-corp taxation saves money
You pay self-employment tax only on your salary — not on the profit you take as distributions.
What's a "reasonable salary"?
The IRS requires S-corp owners to pay themselves fair market wages before taking distributions.
Switching from LLC to S corp
File IRS Form 2553, set up payroll, and file Form 1120-S each year.
Extra paperwork to expect
Payroll tax filings, a separate 1120-S return, and Schedule K-1s for each owner.
Frequently asked questions
Neither is automatically better — it depends on how much your business earns and how you pay yourself. An LLC is simpler and cheaper to run. An S-corp election can lower self-employment tax once your business earns enough to pay a reasonable owner salary and still have profit left over. Many owners start as an LLC and elect S-corp status later as profits grow.
Related reading
Ready to file? Start your business return with TaxAct Business — file your Form 1065 or 1120-S online with step-by-step guidance.
More resources on S corps and LLCs
Compare entity structures, understand filing requirements, and explore tax advantages.
See how C corps and S corps differ on double taxation, shareholder limits, and distributions. A comparison table breaks down rates and compliance, with FAQs on choosing the right corporate structure.
A step-by-step TaxAct Blog guide to filing Form 1120-S, from gathering records to issuing K-1s. Sections walk you through each part of the return and deadline, ideal for a first-time S corp filer.
A TaxAct Blog explainer on Schedule K-1 for partners, S corp shareholders, and trust beneficiaries. Learn what each box means, when to expect your K-1, and how to report it on your personal return.
A TaxAct Blog guide to Form 2553, the IRS election that makes your LLC or corporation an S corp. See who qualifies, the filing deadline for the tax year, and what to do if you miss the election window.
A TaxAct Blog explainer on the qualified business income deduction, worth up to 20% of pass-through income. Learn who qualifies, how income limits apply, and how to claim it on your federal return.
