LLC vs S-Corp

Is the LLC or S-Corp Better For You?

Key differences you should know between the LLC and S-Corp

We are often asked “Which is better, the LLC or s-corporation?” The question is misleading, because you can have both.

Terminology

“S-corporation” is what we typically call a business (LLC or Corporation) that that has filed Form 2553 (aka the “S Election”). The filing of the S Election informs the IRS that the business desires to be taxed under Subchapter S of the Internal Revenue Code. The advantage of S-Corp taxation is a minimization of the Self Employment Tax burdens.

An LLC can be taxed as an S-Corp

An LLC can elect to be taxed as an s-corporation by filing the same Form 2553.

Tax Differences

A multi-member LLC is taxed like a partnership. This means the LLC files a partnership tax return and the partners report/pay taxes individually.

A single-member LLC is taxed like a sole proprietorship. This means the owner of the LLC reports income on his/her personal tax return (Schedule C of the Form 1040).

An LLC taxed as an S-Corp files an S-Corp return annually (Form 1120S). An LLC taxed as an S-Corp has certain tax advantages. The key tax advantage (as of the writing of this webpage) is the ability to reduce your self-employment tax burden.

To take advantage of the tax savings attributable to the s-corporation status, the entity will have to pay its owner(s) a salary. Because running payroll creates many additional administrative tasks, the S Election may not make sense for an entity that would otherwise not have employees.

Why would an LLC want to be taxed as an S Corporation?

S-Corp Restrictions and Limitations

To qualify for s-corporation status, the entity must meet the following requirements:

  • Be a US corporation or LLC;
  • Be owned by only US residents (NOT a partnership, corporation or non-resident alien);
  • Have no more than 100 owners;
  • Have one class of stock (no preferred stock); and
  • Not be an ineligible business (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

In order to become an s-corporation, the entity must submit Form 2553 Election signed by all the owners within 75 days of forming the business.

More Information:

Compare LLCs and Corporations
Side-By-Side Entity Comparison Chart
Please note that tax issues are complex and we are business formation attorneys, not tax specialists. As such, we must recommend that you consult a tax professional if you have specific questions or special circumstances. According to IRS Circular 230 to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this writing was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.