S corp vs LLC: key differences and how to choose

Published Friday 15 May 2026

Table of contents

• What is an LLC?
• What is an S corp?
• How LLCs and S corps are similar
• Key differences between S corps and LLCs
• S corp vs LLC taxes: a detailed comparison
• How S corps and LLCs compare with other structures
• How to set up an LLC or S corp
• Can an LLC elect S corp status?
• Should I choose an LLC or S corp for my small business?
• Manage your business finances with Xero
• FAQs on S corps vs LLCs

Key takeaways

• An S corp is a tax election, not a business entity. You can form an LLC and then elect S corp tax status to combine the simplicity of an LLC with potential tax savings on self-employment taxes.
• S corp tax savings grow with income. At $75K in annual profit, you could save roughly $3,000 to $4,000 in self-employment taxes. At $250K, the savings can exceed $15,000 per year, even after accounting for $2,000 to $5,000 in additional compliance costs.
• LLCs offer more flexibility with fewer rules. There are no ownership restrictions, no required annual meetings, and profit can be split however members agree. S corps require proportional distributions, cap shareholders at 100 US citizens or residents, and carry stricter recordkeeping.
• Your decision depends on profitability and growth stage. If your business earns under $50K annually, an LLC's simplicity usually wins. Once profits consistently exceed $60K, the S corp election often pays for itself through self-employment tax savings.

What is an LLC?

A limited liability company (LLC) is a business entity you register with your state. It separates your personal assets from your business debts and obligations, giving you liability protection without the formality of a corporation.

One of the most misunderstood aspects of an LLC is how it relates to taxes. An LLC is a legal structure, not a tax classification. By default, a single-member LLC is taxed as a disregarded entity, meaning all income passes through to your personal tax return. A multi-member LLC is taxed as a partnership.

LLCs also give you the flexibility to choose a different tax classification. You can elect to be taxed as a C corporation or an S corporation without changing your underlying business structure. This flexibility makes the LLC one of the most popular choices for small business owners.

Learn more in our complete guide to what an LLC is and how it works.

What is an S corp?

An S corporation is a tax election you make with the IRS, not a separate type of business entity. This distinction matters because it changes how you think about the "S corp vs LLC" question entirely.

To become an S corp, you first form a business entity (either a corporation or an LLC), then file IRS Form 2553 to elect S corp tax status. The IRS then treats your business as a pass-through entity, meaning profits and losses flow through to your personal tax return and you avoid the corporate-level tax that C corporations pay.

S corps come with eligibility requirements. Your business can have no more than 100 shareholders, all of whom must be US citizens or permanent residents. You can only issue one class of stock (though voting rights can differ). These rules exist because the S corp designation was designed for smaller, domestically owned businesses.

The biggest advantage of S corp taxation is that it can reduce your self-employment tax bill. As an S corp, you pay yourself a reasonable salary (subject to payroll taxes), then take remaining profits as distributions that are exempt from self-employment tax.

For a deeper look, read our guide on what an S corp is.

How LLCs and S corps are similar

Before diving into the differences, it helps to understand what LLCs and S corps have in common. There are more similarities than most business owners expect.

Both structures provide pass-through taxation. Whether you operate as an LLC (with default tax treatment) or elect S corp status, your business income passes through to your personal tax return. You avoid the double taxation that C corporations face, where profits are taxed at the corporate level and again when distributed as dividends.

Both offer personal liability protection. Your personal assets, such as your home, savings, and personal vehicles, are generally shielded from business debts and lawsuits. This protection holds as long as you maintain proper separation between personal and business finances.

Both require state-level registration. You need to file formation documents with your state, whether that means articles of organization for an LLC or articles of incorporation for a corporation that later elects S corp status. Most states also require you to maintain a registered agent.

Both carry ongoing compliance obligations. Annual reports, state fees, tax filings, and maintaining proper business records apply to both. The specific requirements vary by state, but neither option is entirely "set it and forget it."

Key differences between S corps and LLCs

While LLCs and S corps share foundational features, the differences between them affect your day-to-day operations, tax bill, and long-term flexibility. Here's where they diverge.

Entity type vs tax classification

This is the most fundamental distinction. An LLC is a business entity you create by filing with your state. An S corp is a tax classification you elect with the IRS. You don't "form" an S corp the way you form an LLC. Instead, you form a corporation or an LLC, then choose to be taxed as an S corp.

This means an LLC and an S corp aren't mutually exclusive. Many small business owners form an LLC and then elect S corp tax status, getting the operational simplicity of an LLC with the tax benefits of an S corp.

Taxation

Under default LLC taxation, all net business income is subject to self-employment tax at 15.3% (12.4% for Social Security plus 2.9% for Medicare).

With S corp taxation, you split your income between a reasonable salary (subject to payroll taxes) and distributions (exempt from self-employment tax). This split is where the tax savings come from.

Ownership

LLCs have no limits on the number or type of members. You can have foreign investors, other businesses, or trusts as members. S corps cap ownership at 100 shareholders, and all must be US citizens or permanent residents. Certain trusts and estates qualify, but partnerships, corporations, and non-resident aliens do not.

If you plan to raise capital from international investors or bring on a large number of co-owners, the S corp's restrictions may not work for your business.

Management structure

LLCs can be member-managed (all owners participate in decisions) or manager-managed (designated managers run operations while other members are passive investors). This flexibility is built into your operating agreement.

S corps follow a more traditional corporate structure with a board of directors, officers, and formal roles. Even if you're a single-owner S corp, you technically serve as both director and officer.

Compliance requirements

LLCs generally have lighter compliance obligations. Most states don't require annual meetings or formal minutes, though some require annual reports and fees.

S corps must hold annual shareholder and director meetings, maintain corporate minutes, and follow more structured recordkeeping. You'll also need to run payroll (including filing Forms 941 quarterly and W-2s annually) because you're required to pay yourself a reasonable salary.

Profit distribution

LLC members can distribute profits in any ratio they agree on, regardless of ownership percentages. This flexibility is spelled out in the operating agreement and can be a major advantage when members contribute differently to the business.

S corps must distribute profits proportionally to ownership. If you own 60% of the shares, you receive 60% of distributions. There is no flexibility to allocate profits differently among shareholders.

S corp vs LLC taxes: a detailed comparison

Tax treatment is typically the biggest factor in choosing between an LLC and an S corp. Here's a closer look at how each is taxed and where the savings show up.

How LLCs are taxed

By default, a single-member LLC is treated as a disregarded entity for federal tax purposes. All income flows directly to your personal tax return on Schedule C. A multi-member LLC is taxed as a partnership, filing Form 1065 and issuing Schedule K-1s to each member.

Under both default treatments, all net business income is subject to self-employment tax at 15.3%. For 2026, the 12.4% Social Security portion applies to the first $184,500 in earnings. The 2.9% Medicare portion has no cap, and an additional 0.9% Medicare surtax kicks in at higher income levels.

LLCs can also elect to be taxed as a C corp or S corp by filing the appropriate forms with the IRS.

Learn more about filing business taxes as an LLC.

How S corps are taxed

S corps are pass-through entities, so profits are not taxed at the corporate level. Instead, they pass through to shareholders' personal returns. The key difference from a default LLC is how self-employment taxes apply.

As an S corp owner, you pay yourself a "reasonable salary" for the work you do. This salary is subject to payroll taxes (the employer and employee portions of Social Security and Medicare). Any remaining profit is distributed to you as a shareholder distribution, which is subject to income tax but not self-employment tax.

The IRS requires that your salary be reasonable for the type of work you perform. Setting your salary too low to avoid payroll taxes is a common audit trigger.

Tax comparison at different income levels

The tax savings from an S corp election depend on your income level and how much you can reasonably pay yourself as salary. Here's how the numbers break down at three different profit levels, assuming a reasonable salary of roughly 50-60% of total income.

At $75,000 annual profit (sole owner)

• LLC (default): Self-employment tax on the full $75,000 is approximately $10,597 (15.3% times 92.35% of net earnings)
• S corp with $45,000 salary: Payroll taxes on salary are approximately $6,885 (15.3% of $45,000). The remaining $30,000 in distributions is exempt from SE tax.
• Estimated annual savings: roughly $3,700

At $150,000 annual profit (sole owner)

• LLC (default): Self-employment tax on the full $150,000 is approximately $21,194
• S corp with $80,000 salary: Payroll taxes on salary are approximately $12,240. The remaining $70,000 in distributions is exempt from SE tax.
• Estimated annual savings: roughly $8,900

At $250,000 annual profit (sole owner)

• LLC (default): Self-employment tax is approximately $33,062 (Social Security maxes out at $184,500 in earnings, with Medicare continuing beyond)
• S corp with $120,000 salary: Payroll taxes on salary are approximately $18,360. The remaining $130,000 in distributions is exempt from SE tax.
• Estimated annual savings: roughly $14,700

Keep in mind that S corp status comes with additional compliance costs, typically $2,000 to $5,000 per year for payroll processing, additional tax filings, and accounting support. The break-even point is generally around $40,000 to $50,000 in annual profit, where S corp tax savings begin to outweigh these added costs.

The QBI deduction and pass-through entities

The Qualified Business Income (QBI) deduction allows eligible pass-through entity owners to deduct up to 20% of their qualified business income. This deduction was originally introduced by the Tax Cuts and Jobs Act of 2017 and was made permanent by the One Big Beautiful Bill Act, signed into law on July 4, 2025.

Both LLCs and S corps can qualify for the QBI deduction, so it doesn't typically tip the balance between the two. However, the deduction is subject to income thresholds and may be limited for certain service-based businesses at higher income levels. Consult a tax professional to determine how the QBI deduction applies to your situation.

How S corps and LLCs compare with other structures

Understanding how LLCs and S corps stack up against other common structures can help you see the full picture. For a comprehensive overview, read our guide to choosing a business structure.

LLC vs sole proprietorship

A sole proprietorship is the simplest way to run a business. There's no state filing required and no separation between you and the business. But that simplicity comes with a major trade-off: you have no personal liability protection.

An LLC provides a legal barrier between your personal assets and business obligations. It also gives you tax flexibility, since you can elect S corp or C corp taxation later. A sole proprietorship offers neither of these advantages.

Learn more in our guide on LLC vs sole proprietorship.

S corp vs C corp

A C corporation is taxed at the corporate level (currently 21% federally), and shareholders pay tax again on dividends they receive. This double taxation is the main disadvantage compared to an S corp's pass-through treatment.

However, C corps have no ownership restrictions. They can have unlimited shareholders, foreign investors, and multiple classes of stock. If you plan to raise venture capital or eventually go public, a C corp is typically the better fit. S corps work well for smaller, domestically owned businesses focused on minimizing their overall tax burden.

LLC vs partnership

A general partnership doesn't require state registration, but it also doesn't provide liability protection. Each partner is personally liable for the debts and actions of the other partners.

An LLC structured as a multi-member entity gives you partnership-style flexibility in profit sharing and management while adding the critical layer of personal asset protection. For most multi-owner small businesses, the LLC is the stronger choice.

How to set up an LLC or S corp

The formation process differs depending on which path you take. Here's what to expect for each.

Forming an LLC

1. Choose a business name that complies with your state's naming requirements. Most states require "LLC" or "Limited Liability Company" in the name.
2. File articles of organization with your state's Secretary of State office. Filing fees range from roughly $50 to $500 depending on your state.
3. Create an LLC operating agreement that outlines ownership percentages, management structure, profit distribution, and member responsibilities. While not required in every state, it protects all members.
4. Obtain an Employer Identification Number (EIN) from the IRS. This is free and can be done online.

For a complete walkthrough, read our guide on starting an LLC.

Forming an S corp

1. Form a business entity first, either a corporation (by filing articles of incorporation) or an LLC (by filing articles of organization).
2. File IRS Form 2553 to elect S corporation tax status. The deadline is the 15th day of the 3rd month of the tax year you want the election to take effect.
3. Meet your state's requirements. Some states require a separate state-level S corp election, and ongoing compliance varies.

Expect LLC filing fees of $50 to $500 depending on your state. S corp compliance adds an estimated $2,000 to $5,000 per year for payroll, accounting, and additional tax preparation.

Can an LLC elect S corp status?

Yes, and this is one of the most popular strategies for small business owners who want the best of both worlds. You keep the operational simplicity and flexibility of your LLC while gaining the self-employment tax savings of S corp taxation.

Here's how the process works:

1. File IRS Form 8832 (Entity Classification Election) to elect corporate tax treatment for your LLC. In some cases, you can skip this step and go directly to Form 2553.
2. File IRS Form 2553 (Election by a Small Business Corporation) to elect S corp status. The deadline is the 15th day of the 3rd month of the tax year, so for a calendar-year business, that means March 15.
3. Confirm your LLC meets all S corp requirements: no more than 100 shareholders, all US citizens or permanent residents, and only one class of ownership interest.

Once the election is in place, your LLC continues to operate the same way from a legal and management standpoint. The only change is how the IRS treats your income for tax purposes.

This strategy makes the most sense when your business consistently generates at least $40,000 to $50,000 in annual profit, which is the point where S corp tax savings typically exceed the additional compliance costs.

Should I choose an LLC or S corp for my small business?

The right choice depends on where your business is today and where it's headed. Here's a framework to guide your decision.

Choose an LLC (with default tax treatment) if you:

• Prioritize simplicity and low administrative burden
• Want flexible ownership rules, including the ability to bring on foreign investors
• Prefer minimal compliance requirements
• Are in the early stages of your business or earning under $50,000 annually
• Want to keep your options open to elect S corp status later

Choose S corp taxation if you:

• Generate at least $60,000 in annual profit consistently
• Want to minimize self-employment taxes on a portion of your income
• Can handle the additional compliance requirements, including payroll and formal recordkeeping
• Run an established, profitable business with predictable income
• Are willing to invest $2,000 to $5,000 per year in additional accounting and payroll costs

Many business owners start as an LLC and elect S corp status once their income reaches the break-even point. This keeps things simple in the early years and captures tax savings when they become meaningful.

Next step: consult a tax professional who can run the numbers for your specific situation and help you time the election for maximum benefit.

Manage your business finances with Xero

Whether you go with an LLC, elect S corp status, or choose another path, keeping your finances organized from day one makes every tax and compliance decision easier. Xero's cloud accounting software helps you track income and expenses, manage invoicing, and stay on top of your obligations regardless of your business structure.

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FAQs on S corps vs LLCs

Can I switch from an LLC to an S corp later?

Yes. You don't need to dissolve your LLC or form a new entity. File IRS Form 8832 to elect corporate tax classification, then file Form 2553 to elect S corp status. The Form 2553 deadline is the 15th day of the 3rd month of the tax year you want the election to begin. Your LLC continues to operate as before, with only the tax treatment changing.

What's the difference between an S corp and a C corp?

The main difference is tax treatment. An S corp is a pass-through entity, meaning profits flow directly to shareholders' personal tax returns and are taxed once. A C corp pays corporate income tax on its profits, and shareholders pay tax again on dividends they receive. C corps have no ownership restrictions, while S corps are limited to 100 US shareholders.

Which has better personal liability protection, an S corp or an LLC?

Both provide essentially the same level of personal liability protection. Your personal assets are generally shielded from business debts and lawsuits under either structure. The key to maintaining that protection is keeping your personal and business finances separate and following proper corporate or LLC formalities.

What is a reasonable salary for an S corp owner?

The IRS requires S corp owners who perform services for the business to pay themselves a "reasonable salary" before taking distributions. Reasonable means comparable to what someone in a similar role at a similar company would earn. You can reference the Bureau of Labor Statistics Occupational Employment and Wage Statistics for industry benchmarks. Setting your salary too low is a common audit trigger.

Can a single-member LLC become an S corp?

Yes. A single-member LLC can elect S corp tax status by filing Form 2553 with the IRS. You'll need to meet all S corp eligibility requirements, including the citizenship and shareholder rules. Once elected, you'll need to set up payroll to pay yourself a reasonable salary.

Can an S corp own an LLC?

Yes. An S corp can be a member of an LLC. This is a common structure for business owners who want to hold multiple businesses or assets under separate LLCs while maintaining S corp tax treatment at the parent level. Each LLC is treated as a separate entity for liability purposes, which can provide additional asset protection.