Starting a business comes with a thousand decisions. One of the most important? How to structure your company. For most new entrepreneurs, the choice often comes down to two options: an LLC or an S-Corporation. Both offer liability protection and tax perks, but they operate very differently–and choosing the wrong one can affect everything from how you’re taxed to how you pay yourself to how easily you can grow.
In this post, we’ll break down the key differences between LLCs and S-Corps in plain English. No fluff. No legalese. Just the information you need to make the smartest choice for your business.
What Is an LLC?
An LLC, or Limited Liability Company, is one of the most flexible and popular business structures out there. Why? Because it blends the simplicity of a sole proprietorship or partnership with the liability protection of a corporation. In other words, if your business runs into legal trouble or racks up debt, your personal assets–your home, your savings–are generally off-limits.
From a tax perspective, LLCs are considered “pass-through” entities by default. That means profits and losses go straight to the owners’ personal tax returns. You avoid the dreaded double taxation that corporations face, and you’re taxed once at the individual level.
Key Advantages of an LLC:
- Simple setup and fewer ongoing formalities than a corporation.
- Flexible management: members can run the business, or you can appoint outside managers.
- No limit on the number of owners (a.k.a. “members”).
- Can choose how you want to be taxed–either stick with pass-through treatment or opt to be taxed like an S-Corp.
What to Watch Out For:
- Some states impose higher fees or annual franchise taxes on LLCs.
- Not all investors love LLCs. Venture capitalists often prefer corporations, particularly Delaware C-Corps, for clarity and scalability.
- Self-employment taxes can be higher if you don’t elect S-Corp taxation.
What Is an S-Corp?
An S-Corporation isn’t technically a type of business entity–it’s a tax status that certain corporations or LLCs can elect by filing IRS Form 2553. Once approved, the business remains a corporation (or LLC) but is taxed like a partnership.
Like an LLC, an S-Corp is a pass-through entity, so profits go to shareholders’ personal tax returns. But here’s the twist: shareholders who work in the business must pay themselves a “reasonable salary,” which is subject to employment taxes. The rest of the profits? Not subject to self-employment taxes. That can translate into real tax savings.
Big Perks of an S-Corp:
- Pass-through taxation (no double tax).
- Potential to reduce self-employment tax by splitting income between salary and distributions.
- Liability protection for shareholders.
- Added credibility with investors, banks, and potential partners.
Potential Downsides:
- Stricter rules: only U.S. citizens or residents can be shareholders, and you’re capped at 100 shareholders.
- Only one class of stock allowed–so profit distributions must match ownership percentages exactly.
- More paperwork: regular board meetings, minutes, and corporate records are required.
- Not all states recognize the S-Corp election the same way (and some charge extra fees).
LLC vs. S-Corp: What’s the Real Difference?
Let’s break this down by what most business owners actually care about:
1. Liability Protection:
Both structures offer solid liability protection. Your personal assets are shielded from most business-related debts or lawsuits.
2. Taxes:
- LLCs are taxed as pass-through entities by default but can elect S-Corp taxation.
- S-Corps are always pass-through entities (if they meet IRS requirements) and may offer self-employment tax savings.
- With an LLC, 100% of profits are subject to self-employment taxes unless you elect S-Corp taxation.
- With an S-Corp, only your salary is subject to payroll taxes. The rest can be taken as a distribution–potentially saving you money.
3. Ownership & Structure:
- LLCs offer flexibility in ownership, including partnerships between individuals, corporations, and even non-U.S. citizens.
- S-Corps must follow strict ownership rules: U.S. citizens or residents only, and no more than 100 shareholders.
- LLCs don’t require a board or officers. S-Corps do.
4. Paperwork & Compliance:
- LLCs are easier to manage on a day-to-day basis.
- S-Corps require more formalities: annual meetings, meeting minutes, and keeping a tighter corporate record book.
What About an LLC Taxed as an S-Corp?
Here’s where things get interesting–and where a lot of business owners find their sweet spot.
An LLC isn’t locked into one method of taxation. While it’s taxed as a sole proprietorship or partnership by default, you can elect to have your LLC taxed as an S-Corporation by filing IRS Form 2553 (yep, the same form that corporations use to elect S-Corp status).
So why would an LLC owner do that?
Because it can help you save on self-employment taxes.
Here’s how it works: if your LLC is taxed as a sole proprietorship, then all of your net business income is subject to self-employment taxes (Social Security and Medicare, currently totaling 15.3%). But if you elect to have your LLC taxed as an S-Corp, you’ll pay yourself a reasonable salary, which is subject to payroll taxes–then you can take the rest of the business profits as distributions, which are not subject to self-employment tax.
That can mean big savings, especially if your business is bringing in steady, healthy profits.
Let’s say your business earns $120,000 in profit. If you don’t elect S-Corp taxation, that full $120,000 could be subject to self-employment tax. But if you pay yourself a salary of $60,000 (which the IRS considers “reasonable” for your role), only that $60K is subject to employment taxes. The other $60K? It comes to you as a distribution–with no employment tax.
Why not just start as an S-Corp?
Because keeping the LLC structure gives you the best of both worlds:
- You keep the simplicity and flexibility of an LLC (no strict shareholder limits, no board meetings or rigid corporate structure),
- But you unlock the tax efficiency of an S-Corp.
Of course, once you elect S-Corp tax treatment, you do need to run payroll, file the right returns, and comply with IRS rules about reasonable compensation. It’s not “set it and forget it”–but for many LLC owners, the tax savings are worth the extra work.
If you’re not sure whether your business has reached the point where electing S-Corp status makes sense, that’s a great topic to talk through with your CPA–or with an attorney like me who understands how the tax and legal sides connect.
| Feature | Default LLC Taxation | LLC Taxed as an S-Corp | S-Corporation |
|---|---|---|---|
| Entity Type | LLC | LLC | Corporation |
| Tax Status | Pass-through (sole prop or partnership) | Elects S-Corp tax status via IRS Form 2553 | Elects S-Corp tax status via IRS Form 2553 |
| Self-Employment Taxes | Applies to all net income | Only salary is subject to employment tax; distributions are not | Only salary is subject to employment tax; distributions are not |
| Owner Payroll Required? | No | Yes | Yes |
| Management Flexibility | High (member- or manager-managed) | High (same as LLC) | Formal (board of directors + officers) |
| Ownership Restrictions | Few restrictions | Follows S-Corp shareholder limits after election | U.S. citizens/residents, max 100 shareholders |
| Record-Keeping | Minimal | Moderate (payroll filings, some formalities) | Higher (minutes, annual meetings, filings) |
| Best For | Simple businesses, new startups | Profitable LLCs wanting to save on self-employment tax | Established businesses prioritizing tax efficiency and investor readiness |
How to Choose: Key Factors to Consider
When you’re weighing whether to form an LLC or S-Corp, consider the following:
1. How You Want to Pay Yourself
Want to keep things simple and just draw profits directly? An LLC might suit you. Want to take a salary and possibly save on self-employment tax? Consider an S-Corp.
2. Growth Plans & Investors
If you’re planning to bring on investors, raise venture capital, or scale nationally, you’ll want to think carefully. Investors often prefer corporations, which could mean starting as or converting to a C-Corp down the road.
3. Your State’s Rules
Some states impose higher fees on LLCs or don’t fully recognize S-Corps. Texas, Arizona, and Utah all treat these entities slightly differently, so it’s worth reviewing your specific state’s tax rules–or talking to someone who knows them (hint: me).
4. Admin Tolerance
Do you mind holding board meetings and keeping corporate minutes? If not, the S-Corp’s added complexity might be worth the tax perks. If you’d rather just run your business and not fuss with formalities, an LLC might be your best bet.
How to Set One Up (Without Losing Your Mind)
To form an LLC:
- File Articles of Organization with your state.
- Choose a registered agent.
- Draft an Operating Agreement (especially important for multi-member LLCs).
- Get an EIN from the IRS.
- Comply with any state-specific licensing or reporting requirements.
To form an S-Corp:
- First, form a corporation or LLC.
- Then file IRS Form 2553 to elect S-Corp status.
- Set up payroll (so you can pay yourself that “reasonable salary”).
- Stay on top of corporate formalities and tax deadlines.
Whichever you choose, make sure it matches your goals–not just for today, but for where you want your business to be 2, 5, or 10 years from now.
Final Thoughts: The Right Structure Is the One That Works for You
There’s no one-size-fits-all answer when it comes to LLCs versus S-Corps. Both offer liability protection and potential tax savings. The real question is: What’s your vision for your business, and what structure supports it best?
If you’re looking for simplicity, flexibility, and an easy way to get started, an LLC might be the right move. If you’re earning enough to benefit from tax savings and don’t mind the formalities, an S-Corp could be a smart next step.
Still on the fence? Let’s talk. I help business owners in Utah, Arizona, and Texas weigh these decisions every day. And I’d be happy to help you, too.
