S Corp vs. LLC: Key Differences, Tax Benefits, and How to Choose the Right Structure

Most business owners aren’t necessarily excited about legal structures, but the choice between an LLC vs an S Corp can shape your taxes, liability and even how you pay yourself. Pick the wrong one, and you may find yourself buried in unnecessary costs or paperwork. Pick the right one, and your business runs smoother with more money in your pocket.

So let’s take a look at how LLCs and S Corps differ, what each really offers and how to decide which option lines up with your business goals.

S Corp vs. LLC: Which Business Structure is Right for You?

An LLC is widely chosen for its simplicity. It requires fewer formalities, allows unlimited members and can be managed directly by owners or through appointed managers. The flexibility of this makes it appealing to freelancers, partnerships and small businesses who want a low-maintenance structure.

An S Corporation, however, is more restrictive. It limits ownership to 100 U.S. shareholders, allows only one class of stock and requires more formal governance. But the payoff can be significant. S Corps may reduce self-employment taxes for owner-employees by splitting income between salary and shareholder distributions.

Both structures are pass-through entities, so you’ll most definitely avoid the double taxation that C Corporations face. The S Corp vs. LLC decision really depends on your goals: simplicity and fewer restrictions may point toward an LLC, while long-term tax planning and structured growth may favor an S Corp.¹

What is an S Corp?

What is an S Corp? It is not a business entity on its own but rather a tax election available to qualifying corporations and, in some cases, LLCs. The designation allows profits and losses to pass through to shareholders’ personal tax returns, while avoiding federal corporate income tax.

To qualify, the business must meet IRS requirements:

• It can have no more than 100 shareholders,
• All must be U.S. citizens or residents
• It may only issue one class of stock.²

An S Corp differs from an LLC as it must adopt bylaws, hold shareholder and board meetings, and maintain corporate minutes, which may add complexity. The structure also provides benefits such as payroll tax savings and credibility with investors.

In the S Corp vs. LLC comparison, the S Corp appeals to businesses ready for more formality in exchange for potential tax advantages and governance systems that can scale with future growth.¹

What is an LLC?

LLC stands for Limited Liability Company, and it’s designed to protect its owners, called members, from personal responsibility for business debts and legal liabilities. This means a member’s personal assets, like homes or cars, are generally shielded if the company faces lawsuits or creditors.

An LLC is flexible in ownership as well; there is no cap on the number of members, and owners can include individuals, corporations or even foreign entities.¹ From a tax perspective, an LLC defaults to pass-through taxation, meaning profits and losses are reported on the members’ personal tax returns. However, LLCs may elect to be taxed as an S Corp if doing so reduces self-employment taxes.²

So if you’ trying to choose between an S Corp and an LLC, you should consider that an LLC is a bit more flexible, especially for businesses that are looking for growth potential and minimal administrative burden.³

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What are the Benefits of An S Corp?

The benefits of an S Corp center on tax advantages and added credibility. As a pass-through entity, an S Corp avoids the double taxation faced by C Corporations while providing owner-employees with unique opportunities to lower their overall tax burden. Beyond taxes, its structured governance can also boost trust with lenders and investors.

Key benefits of an S Corp include:

• Pass-through taxation that avoids corporate-level tax.² \
• Ability for owner-employees to split income between salary (payroll tax) and distributions (not subject to self-employment tax).¹ \
• Potential for significant self-employment tax savings compared to a default LLC.¹ \
• Formal corporate structure that may enhance credibility with lenders and investors.³ \
• Eligibility for the Qualified Business Income (QBI) deduction, which can reduce taxable income further.³

What are the Benefits of an LLC?

The benefits of an LLC revolve around flexibility and simplicity. LLCs protect owners from personal liability while offering broad freedom in ownership, management, and taxation. With fewer restrictions than an S Corp, an LLC can adapt to the needs of different businesses, from solo entrepreneurs to larger partnerships, without the burden of complex corporate formalities.

Key benefits of an LLC include:

• Flexible ownership with no limit on members, including individuals, corporations and foreign investors.²
• Choice of management structure: member-managed or manager-managed.²
• Default pass-through taxation, with profits and losses reported on owners’ personal tax returns.¹
• Option to elect S Corp or C Corp taxation if it proves more advantageous.¹
• Lighter administrative requirements compared to S Corps, with fewer filings and less recordkeeping.³
• Strong asset protection, shielding members’ personal assets from business debts and liabilities.³

S Corp vs. LLC Tax Benefits

The tax differences between an S Corp and vs. LLC can have a big impact on a business owner’s bottom line. Both avoid double taxation through pass-through treatment, but how profits are taxed and how owners pay themselves vary significantly. LLCs are simpler but may face higher self-employment taxes, whereas S Corps can reduce that burden with salary and distribution strategies.

It’s imperative to understand the differences so business owners can decide which option maximizes savings while balancing compliance requirements.

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Final Thoughts

Deciding between an S Corp vs. LLC ultimately comes down to your business’s stage, goals and tolerance for administrative work. An LLC is often the starting point for many entrepreneurs because it’s simple to set up, flexible in ownership and protective of personal assets.¹ It requires less paperwork and allows you to focus more on running the business than on compliance.³ However, as profits grow, the potential tax savings of electing S Corp status become more attractive. An S Corp lets you split income between salary and distributions, often lowering self-employment taxes, though it comes with stricter rules and additional filings.²

Neither option is universally “better,” but the right choice depends on whether you value flexibility and simplicity or structured tax advantages. It’s imperative to review your income, growth plans and willingness to handle added compliance so you can determine which structure best supports your business’s long-term success.¹

FAQs

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

Yes. Many entrepreneurs start with an LLC because it’s simple and flexible, then elect S Corp taxation once profits increase. The IRS allows LLCs to file Form 2553 to be taxed as an S Corp, provided the eligibility requirements are met. The flexibility of this makes LLCs appealing because you can start lean and adapt as your business grows.²

How do retirement and benefits differ in an S Corp vs. an LLC?

An often-overlooked factor is how each structure handles retirement plans and benefits. S Corps allow owner-employees to participate in corporate retirement plans, such as a 401(k), and deduct contributions as a business expense.¹ LLC members, unless taxed as an S Corp, typically contribute as self-employed individuals, which may limit plan options or contribution amounts.³ Health insurance and fringe benefits can also be treated differently. \

In an S Corp, owner-employees may access group plans, though premiums may be partially taxable depending on ownership.² In an LLC, members usually pay health premiums personally and deduct them on individual returns.³ If building retirement savings and accessing group benefits is a priority, the S Corp setup may be better for you.²

What happens if I don’t follow the rules of my chosen structure?

Compliance matters here. If you form an LLC but mix personal and business finances, courts could “pierce the corporate veil,” leaving you personally liable for debts.³ Similarly, if you run an S Corp but fail to follow IRS requirements, like paying yourself a reasonable salary, the IRS can reclassify distributions as wages and hit you with penalties.¹

Another thing to think about is that missing required filings or shareholder meetings in an S Corp can also jeopardize your status.² In both cases, sloppy compliance can sabotage the protections these structures are meant to provide.³

Sources:

1. S Corp vs. LLC: What’s the Difference and How to Choose | Stripe
2. S Corp vs. C Corp vs. LLC: What’s the Difference and Which One Is Better for Your Business? | Thomson Reuters
3. S Corp vs. LLC: Which Should I Choose? | Investopedia