LLC vs S Corp: What’s the Real Difference?
“LLC” describes a legal entity formed under state law. “S corp” describes a federal tax status. You form an entity, then may elect S-corporation taxation if eligible. Educational comparison only.
| Topic | LLC (default tax) | S corporation tax |
|---|---|---|
| What it is | State legal entity | Federal tax election |
| Formation | File with state + pay LLC filing fee | Form entity first, then IRS election if eligible |
| Ownership limits | Very flexible | Strict limits on shareholders and stock classes |
| Self-employment tax | Often on net earnings for active members | Salary subject to payroll tax; qualifying distributions treated differently |
| Formalities | Generally lighter | Reasonable salary + payroll compliance |
Frequently asked questions
What is the difference between an LLC and an S corp?
An LLC is a state legal entity. An S corp is a federal tax election. You form an LLC (or corporation) with the state, then may elect S-corporation tax treatment with the IRS if you meet eligibility rules.
Can an LLC be taxed as an S corp?
Yes. A qualifying LLC can elect S-corporation status by filing the appropriate IRS form if it meets shareholder and structure rules.
Advantages of S corp over LLC default taxation?
For some profitable owner-operators, S-corp taxation can reduce self-employment tax by splitting income into reasonable salary and distributions. It adds payroll formalities. Whether it helps depends on profit level and state rules.
Is an S corp better than an LLC?
Neither is universally better. Many small businesses start as LLCs for flexibility, then evaluate an S-corp election later with a tax professional.
Related
Educational only. Consult a qualified tax professional before electing S-corporation status.