S-Corp vs LLC: Which Is Right for Your Business?
Choose an LLC for simplicity and flexibility — especially if you earn under $80K/year in profit. Choose S-Corp status (which you can elect as an LLC) when your net income exceeds $80K and you want to reduce self-employment taxes by paying yourself a reasonable salary.
S-Corp vs LLC: Side-by-Side Comparison
| Category | S-Corp | LLC |
|---|---|---|
| Liability Protection | Full personal asset protection | Full personal asset protection |
| Federal Tax Treatment | Pass-through (salary + distributions) | Pass-through (all profit is income) |
| Self-Employment Tax | Only on salary portion | On all net income (15.3%) |
| Formation Cost | $50–$500 + state fees | $50–$500 + state fees |
| Ongoing Paperwork | Payroll, minutes, annual meetings | Minimal — annual report only in most states |
| Ownership Flexibility | Max 100 shareholders, US citizens/residents only | Unlimited members, no restrictions |
| Profit Distribution | Must be proportional to ownership | Flexible — can split however you agree |
| Best For | Profitable businesses ($80K+ net income) | New businesses, side hustles, real estate |
Liability Protection
Full personal asset protection
Full personal asset protection
Federal Tax Treatment
Pass-through (salary + distributions)
Pass-through (all profit is income)
Self-Employment Tax
Only on salary portion
On all net income (15.3%)
Formation Cost
$50–$500 + state fees
$50–$500 + state fees
Ongoing Paperwork
Payroll, minutes, annual meetings
Minimal — annual report only in most states
Ownership Flexibility
Max 100 shareholders, US citizens/residents only
Unlimited members, no restrictions
Profit Distribution
Must be proportional to ownership
Flexible — can split however you agree
Best For
Profitable businesses ($80K+ net income)
New businesses, side hustles, real estate
Liability Protection
Both S-Corps and LLCs provide full personal asset protection. Your personal savings, home, and other assets are shielded from business debts and lawsuits. This is the primary reason most small business owners choose either structure over operating as a sole proprietorship.
The protection is identical in practice. Whether you choose an S-Corp or LLC, you get the same "corporate veil" that separates your personal and business finances. The key requirement is maintaining that separation — don't mix personal and business funds.
Tax Treatment
This is where S-Corps and LLCs differ most. Both are "pass-through" entities, meaning business profits flow to your personal tax return. But how those profits are taxed is different.
With an LLC, all net profit is subject to self-employment tax (15.3% for Social Security and Medicare). If your LLC earns $100K in profit, you pay self-employment tax on the full $100K.
With an S-Corp, you split your income into salary and distributions. Only your salary is subject to employment taxes. If your S-Corp earns $100K and you pay yourself a $60K salary, you only pay employment taxes on $60K — saving roughly $6,120 in self-employment taxes.
The catch: Your salary must be "reasonable" by IRS standards. You can't pay yourself $20K if comparable jobs pay $60K. And you must run payroll, which adds $500–$2,000/year in costs.
Formation Process
Here's a key distinction: an S-Corp isn't actually a business entity — it's a tax election. Most business owners form an LLC first, then elect S-Corp tax status with the IRS by filing Form 2553.
This means you get the operational simplicity of an LLC with the tax benefits of an S-Corp. The formation process is: (1) Form your LLC with your state, (2) File Form 2553 with the IRS within 75 days of formation.
If you form a corporation (Inc.) instead, you can also elect S-Corp status. But LLCs are generally preferred because they have fewer governance requirements.
Ongoing Requirements
LLCs are simpler to maintain. In most states, your only requirement is filing an annual report and maintaining a registered agent. Total annual cost: $50–$300 depending on your state.
S-Corps add payroll obligations: you must run regular payroll for yourself, file quarterly payroll tax returns (Form 941), issue W-2s, and potentially file Form 1120-S annually. This adds complexity and cost — typically $500–$2,000/year for payroll services.
S-Corps also technically require annual shareholder meetings and corporate minutes, though enforcement is minimal for single-owner S-Corps.
Cost Comparison
Formation costs are similar — both require state filing fees ($50–$500) and optionally a formation service ($0–$300).
The ongoing cost difference is where it matters. An LLC costs $50–$300/year in state fees. An S-Corp adds $500–$2,000/year in payroll costs plus $500–$1,500 for a more complex tax return.
The breakeven point: S-Corp tax savings typically exceed the additional costs when your net business income surpasses $80,000/year. Below that threshold, the extra administrative cost of an S-Corp often isn't worth the tax savings.
Which Should You Choose?
Choose S-Corp if...
- Your LLC net income consistently exceeds $80,000/year
- You want to reduce self-employment taxes
- You're comfortable running payroll for yourself
- You plan to keep the business long-term
- You have a CPA or tax advisor who can manage the additional filings
Choose LLC if...
- You're just starting out or earn under $80K/year in profit
- You want the simplest possible business structure
- You want flexibility in profit distribution
- You have foreign investors or more than 100 members
- You own rental real estate (S-Corp election doesn't help with passive income)
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Frequently Asked Questions
Can an LLC be taxed as an S-Corp?
Yes. You can form an LLC and then elect S-Corp tax treatment by filing IRS Form 2553. This gives you the legal simplicity of an LLC with the tax benefits of an S-Corp. This is the most common approach for small business owners.
When should I switch from LLC to S-Corp?
Consider electing S-Corp status when your LLC net income consistently exceeds $80,000/year. At that point, the self-employment tax savings typically outweigh the additional costs of running payroll and filing a more complex tax return.
Is an S-Corp better than an LLC for taxes?
It depends on your income level. For businesses earning over $80K/year in net profit, S-Corp status can save thousands in self-employment taxes. For businesses earning less, the additional administrative costs make it a worse deal.
Do I need a separate EIN for S-Corp election?
No. If you already have an EIN for your LLC, you keep the same EIN when you elect S-Corp tax treatment. The IRS simply changes how your existing entity is taxed.
Can I switch back from S-Corp to LLC taxation?
Yes, but there's a waiting period. If you revoke your S-Corp election, the IRS generally won't allow you to re-elect S-Corp status for 5 years. Consult a tax professional before revoking.