LLC vs S-Corp — Which Should You Choose?
This is the most common tax question founders ask — and the most misunderstood. An LLC is a legal entity, S-Corp is a tax election. You can have both. Here’s when to use each to save on taxes and protect yourself.
LLC vs S-Corp Explained in 30 Seconds
They are not two different business types — one is a legal structure, one is a tax status.
Key Distinction Most Guides Miss
LLC = Legal entity created by your state. It gives you limited liability protection — your personal house, car, savings protected from business debts and lawsuits if you keep finances separate. Formed by filing Articles of Organization with Secretary of State.
S-Corp = Tax election you make with IRS via Form 2553. It is NOT a legal entity by itself. It tells IRS how you want your LLC (or corporation) taxed. S-Corp lets you split income into salary + distributions to save on self-employment tax.
You can be both: Form an LLC in your state, then elect to be taxed as S-Corp with IRS. That’s what most profitable small businesses do — “LLC taxed as S-Corp”. You get liability protection of LLC + tax savings of S-Corp.
LLC Protection
State-level liability shield. Protects personal assets from business debts, lawsuits, vendor claims. Requires Articles of Organization + registered agent + separate bank account.
S-Corp Tax Savings
Federal tax election. Lets you pay yourself reasonable salary (subject to payroll tax) + take remaining profit as distribution NOT subject to 15.3% self-employment tax. Saves thousands when profit is high.
You Can Have Both
Start as LLC (default disregarded/partnership taxed), then elect S-Corp when profit consistently $50k-$80k+. No need to form new entity — just file Form 2553.
LLC vs S-Corp — Full Comparison
LLC is about protection, S-Corp is about taxes. Here’s how they differ.
| Factor | LLC (Default Taxed) | LLC Taxed as S-Corp (Form 2553) |
|---|---|---|
| What It Is | Legal entity formed by state — liability protection | Same LLC legal entity + IRS tax election Form 2553 |
| Liability Protection | Yes — personal assets protected | Yes — same LLC protection, tax election doesn’t affect liability |
| Federal Tax Filing | Single-member: Schedule C on personal 1040 Multi-member: Form 1065 + K-1s | Form 1120-S S-corp return + K-1s + W-2 for owner salary + payroll filings 941/940 |
| Self-Employment Tax 15.3% | On ALL net profit — single-member full profit, multi-member each active member’s share | Only on reasonable salary, NOT on distributions — can save $5k-$15k/yr when profit high |
| Reasonable Salary Requirement | No — owner draws, no payroll needed | Yes — must run payroll and pay yourself reasonable salary for your role/industry |
| Paperwork & Cost | Low — no payroll, no 1120-S, simple | Higher — payroll service $30-$50/mo, 1120-S CPA $500-$1,500/yr, quarterly payroll filings |
| When It Makes Sense | Profit under $40k-$60k, just starting, want simplicity, side hustle, testing idea | Profit consistently $50k-$80k+ net, want to save on SE tax, willing to run payroll and extra filings |
Example: How Much S-Corp Saves
Let’s say your LLC nets $100k profit after expenses:
- LLC default taxed: You pay 15.3% self-employment tax on full $100k = $15,300 SE tax + income tax on $100k
- LLC taxed as S-Corp: You pay yourself reasonable salary $60k (payroll tax on $60k = $9,180) + $40k distribution not subject to SE tax. SE tax savings = $15,300 – $9,180 = $6,120 saved + income tax same on total $100k. Minus payroll costs $500-$800 and CPA $800-$1,200 for 1120-S — net savings ~$4k-$5k/yr. At $150k profit, savings ~$8k-$10k.
This is why CPA rule of thumb: consider S-corp election when net profit consistently hits $50k-$80k+.
Bottom line: Start as LLC for liability protection and simplicity. Stay as LLC default taxed while profit is under $40k-$60k. Elect S-corp when profit consistently $50k-$80k+ to save on self-employment tax. You don’t need to choose LLC OR S-corp — you can have LLC taxed as S-corp.
When Should You Elect S-Corp?
Use this checklist — don’t elect too early.
- ✓Stay as LLC default if profit under $40k-$60k net
S-corp payroll + CPA costs eat savings. Simplicity wins. File Schedule C (single-member) or 1065 + K-1s (multi-member) and pay SE tax on full profit.
- ✓Consider S-corp election if profit consistently $50k-$80k+ net
At this level, SE tax savings outweigh payroll + 1120-S CPA costs. Must run payroll and pay reasonable salary — IRS watches this. File Form 2553 within 75 days of formation or by March 15 for current tax year.
- ✓Must have CPA or payroll service for S-corp
S-corp requires W-2 for owner salary, quarterly 941 payroll filings, annual 940, and 1120-S return. Use Gusto, QuickBooks Payroll, or Doola bookkeeping. Don’t DIY S-corp without payroll system — IRS penalties for late payroll filings are steep.
- ✓S-corp has restrictions
Max 100 shareholders, only one class of stock, shareholders must be US citizens/residents individuals (no corporations/partnerships), all must be same class. If you have foreign owners or want different profit splits not tied to ownership %, S-corp may not work — stay as LLC partnership taxed or C-corp.
- ✓California and New York quirks
California charges 1.5% franchise tax on S-corp net income (minimum $800 still applies) vs $800 flat for LLC. New York City doesn’t recognize S-corp — NYC taxes S-corp as C-corp. Factor state taxes before electing.
Best Services to Form LLC & Elect S-Corp
All three handle LLC formation + S-corp election paperwork — difference is legal support vs bookkeeping.
LegalZoom
LegalZoom is best if you want attorney guidance on whether S-corp makes sense, reasonable salary analysis, and proper Form 2553 filing. They also provide attorney-reviewed Operating Agreement for LLC taxed as S-corp and handle state S-corp filings if your state requires separate election.
Bizee
Bizee offers free LLC formation + $0 + state fee, plus S-corp election filing service for $99. Best for founders who already know they want LLC taxed as S-corp and want cheapest compliant filing with free registered agent year 1.
Doola
Doola bundles LLC formation, EIN, S-corp election (Form 2553), US bank account, bookkeeping, and payroll setup. Perfect if you elect S-corp and don’t want to manage Gusto + QuickBooks + CPA separately — everything in one dashboard with K-1s and 1120-S support.
Our pick for LLC vs S-corp: Form LLC now with Bizee $0 + state fee (or LegalZoom if you want attorney review). Stay default taxed until profit consistently $50k-$80k+. Then elect S-corp via LegalZoom or Doola which handles payroll + 1120-S. Don’t elect S-corp on day one if profit under $40k — you’ll pay more in payroll/CPA than you save.
LLC vs S-Corp FAQ
Form an LLC first — it’s your legal entity that gives liability protection. Then elect S-Corp taxation later when profitable enough to save on self-employment tax. S-Corp by itself is not a legal entity — it’s just a tax election. You can be an LLC taxed as S-Corp and get both benefits.
Yes. File IRS Form 2553 to elect S-Corp status for your existing LLC. Deadline: within 75 days of formation for current year, or by March 15 of year you want election effective. Late election relief available via Rev Proc 2013-30 if you miss deadline — file within 3 years and 75 days with reasonable cause.
IRS requires S-Corp owners who work in business to pay themselves reasonable salary for role, industry, experience, and location before taking distributions. No fixed %, but common range 40-60% of net profit for many small businesses. Use Bureau of Labor Statistics, salary.com, or CPA reasonable compensation report. Too low salary triggers IRS audit — they reclassify distributions as wages plus penalties.
Sometimes less. California taxes S-Corp at 1.5% of net income (minimum $800) vs LLC $800 flat + LLC fee based on revenue. At high profit, 1.5% can exceed LLC fee. New York City doesn’t recognize S-corp election — NYC taxes S-corp as C-corp, causing double tax at city level. Run numbers with CPA for CA/NY before electing.
Yes. Both single-member and multi-member LLCs can elect S-Corp. Single-member LLC taxed as S-Corp files 1120-S + W-2 for owner salary. Multi-member LLC taxed as S-Corp also files 1120-S + K-1s + W-2s for active members. Election same — Form 2553.
Higher paperwork and cost — payroll service $30-$50/mo, quarterly payroll filings, annual 1120-S CPA $500-$1,500, reasonable salary requirement, 100 shareholder limit, only US citizen/resident individuals can be shareholders, one class of stock, stricter IRS scrutiny on distributions vs salary. Not worth it under $40k-$60k profit.
Ready to Decide?
Start as LLC now for protection + simplicity. Elect S-Corp later when profit justifies payroll costs. Don’t overcomplicate on day one.
Affiliate Disclosure: This guide is reader-supported. If you sign up through links on this page, we may earn an affiliate commission at no additional cost to you. Our editorial content is independent and not influenced by our affiliate partnerships. S-Corp is a tax election under Subchapter S of Internal Revenue Code.