An LLC is a legal structure, while an S corporation is a tax election. Many LLCs choose to be taxed as S corporations to potentially reduce self-employment taxes.
Key differences
- An LLC is created under state law and offers liability protection.
- S corporation status is a federal tax election available to qualifying corporations and LLCs.
- S corporations have ownership restrictions, such as limits on the number and type of shareholders.
- S corporations generally must pay owners who work in the business a reasonable salary.
Why owners consider it
Profits distributed beyond the owner's salary in an S corporation may not be subject to self-employment tax, which can save money at higher profit levels. Payroll, filings and compliance add costs.
Questions to ask
- What are my expected profits?
- Can I pay myself a reasonable salary?
- How will extra payroll and tax filings cost?
- Do state taxes differ?
- Do I plan to bring in investors?
Get advice
The best choice depends on your income and state. A CPA or tax attorney can model the savings and risks, and file the election correctly and on time.
Frequently asked questions
Can an LLC elect S status?
Yes, if it meets requirements.
Does S status change liability?
No. Liability protection comes from the legal entity.