S Corp vs. LLC: What’s the Difference Between an S Corp and an LLC?

When you open a business, the legal structure you choose can affect how you’re taxed, your legal liabilities, and your day-to-day operations. Fortunately, the IRS gives you some leeway in how you set up your company. 

The S corp and LLC structures are two popular options, but weighing the two isn’t quite an apples-to-apples comparison. An LLC is a business structure that provides legal protection, while S corp is a tax treatment or business filing status. 

This guide will walk you through the key differences between LLCs vs. S corps, so you can choose the setup that best fits your business.  

What is an LLC?

A limited liability company, or LLC, is a type of business structure that provides legal protection and pass-through taxation for its owners, who are called members. 

There’s no limit to the number of members who can join—the business is either categorized as a single-member or multi-member LLC—and those members can be a mix of individuals, corporations, other LLCs, and foreign entities. 

If the business is sued or defaults on its debts, the members’ personal assets are generally shielded from creditors. (This can change in certain cases, such as when you sign a personal guarantee on a business loan.)

To establish an LLC, you’ll need to file paperwork at the state level and choose a tax treatment: partnership, disregarded entity (for single-member LLCs), S corporation, or C corporation. 

All but the C corp structure allow for pass-through taxation. That means your profits and losses flow through the business to your members, allowing you to avoid the double taxation that traditional C corps face. 

The LLC structure isn’t without its downsides, though. Chief among them: Members must pay self-employment taxes on their entire share of the LLC’s profits. (If your business qualifies for the S corp designation, it may help reduce the tax load.) 

Additionally, the business can’t issue stock because it’s owned by members with ownership interests (rather than shareholders who buy shares). This limits the business’s options when it comes to raising capital. LLCs also must follow any ongoing legal requirements, which vary by state.  

Benefits of an LLC

• Ownership flexibility: An LLC can have one or more members, and those members can be individuals, corporations, other LLCs, and foreign entities. 
• No board of directors requirement: The business can choose whether or not to have a board of directors. Without a board, the members can make decisions more freely.
• Tax flexibility: LLC members can choose the tax treatment that best fits their business.  
• Limited liability protection: The members’ personal assets are protected against lawsuits and debt collections related to the business.

Drawbacks to an LLC

• Self-employment taxes: LLC members pay taxes on all net profits from the business unless they choose the S corp status.
• Regulated by state laws: The business must follow laws in the state where it’s registered. Each state has different fee structures and rules for maintaining the business. 
• Limited access to capital: LLCs can’t issue stock, which limits the types of capital they can raise.

What is an S corp?

An S corporation, or S corp, is a special type of business structure that offers a unique tax treatment for entrepreneurs. 

The key advantage is how S corps handle payroll taxes. Like LLCs, S corps are pass-through entities that filter profits and losses to their owners. Each shareholder must be paid a reasonable salary for their services, and that salary is subject to payroll taxes (like any employee’s wages). 

However, if the business generates additional revenue, shareholders can also receive payment through corporate distributions. These distributions are not subject to payroll taxes, which lowers the shareholder’s tax bill.

S corps also offer the same protections LLCs provide. Owners aren’t responsible for legal claims and debts incurred by the business (unless the owner provides a personal guarantee). 

To establish an S corp, you’ll register the business at the state level and file IRS Form 2553 to officially elect S corp status. But only some businesses will qualify. To elect S corp status, a company must: 

• Be a domestic corporation or eligible entity.
• Have no more than 100 shareholders.
• Ensure all shareholders are U.S. citizens or resident individuals.
• Offer only one class of stock.

Benefits of an S corp

• Avoid double taxation: The S corp’s profits and losses flow through the business to its shareholders, so earnings are only taxed at the individual level.
• Potential tax savings: Owners can receive part of their income as distributions, which aren’t subject to self-employment taxes.
• Liability protection: The company is a separate legal entity from its owners. In most cases, the owners’ personal assets are protected against the business’s lawsuits and debts.

Drawbacks to an S corp

• Strict ownership rules: An S corp can have no more than 100 shareholders, and they all must be U.S. citizens or residents. 
• Increased administrative burden: S corps must follow corporate formalities like maintaining bylaws and holding regular meetings.
• Less flexibility in profit distribution: The business must distribute profits according to ownership percentage. There’s no room for creative allocations.
• Formation and maintenance requirements: S corps must take additional steps to form the business (like filing Form 2553). They also must fulfill ongoing state and federal requirements.

Differences between LLC vs. S corp

Here’s a side-by-side comparison of LLCs vs. S corps:

How to choose between LLC vs. S corp

When deciding between an LLC and S corp, consider how you plan to receive income from your business and what kind of administrative work you’re comfortable managing. 

An LLC offers simplicity and flexibility, which is ideal if you’re looking for customizable ownership splits and straightforward pass-through taxation. 

An S corp, on the other hand, can provide tax savings if you’ll be taking home a sizable profit and you’re OK with more structure, including paying yourself a reasonable salary and keeping up with corporate filings. 

Because the choice depends on your income level, business goals, and state regulations, it might be best to consult with a tax pro or financial adviser to help you make the decision.