Don’t Start a Business in 2025 Until You See THIS (LLC vs S-Corp)

Choosing the Right Structure Can Save (or Cost) You Thousands

If you're starting or growing a small business, one of the most important legal decisions is how to structure your business entity.

For many U.S. business owners, the choice comes down to:

👉 LLC (Limited Liability Company) or

👉 S-Corporation (S-Corp election with the IRS)

These two are often confused, but they offer very different tax benefits, ownership rules, and administrative requirements.

This guide explains exactly what each structure is, when to use one or the other, and how to make the smartest choice for your goals.

LLC vs. S-Corp: What’s the Difference?

Structure	What It Is	Key Authority
LLC	A state-level legal entity that protects your personal assets	Created by state law
S-Corp	A federal tax status you can elect for an LLC or corporation	Managed by the IRS

An S-Corp is not a legal entity type — it's a tax designation you apply for after forming an LLC or corporation.

How Each Structure Works

🔷 LLC (Limited Liability Company)

• Created at the state level

• Offers limited liability protection

• Flexible taxation (default = pass-through)

• Simple compliance and structure

🔷 S-Corp (Subchapter S Corporation)

• Must first be an LLC or C-Corp

• Elect S-Corp status via IRS Form 2553

• Allows “reasonable salary + dividend distributions”

• Must meet strict IRS requirements

Side-by-Side Comparison: LLC vs S-Corp

Feature	LLC	S-Corp
Legal Structure	An entity formed by the state	Tax election made with the IRS
Taxation	Pass-through (default)	Pass-through, but with payroll requirements
Self-Employment Taxes	Full SE tax on all profits	Salary subject to SE tax; distributions are not
Owner Requirements	No restrictions	U.S. citizens/residents only, <100 shareholders
Management Flexibility	Very flexible	Formal board, shareholder structure
Paperwork	Minimal	Moderate (payroll, minutes, separate filings)
Best For	New or small businesses	Profitable businesses with $40k+ net income

Key Factors to Consider

Taxes

• LLCs pay self-employment tax on all profits.

• S-Corp owners split income between:

  • Reasonable salary (subject to SE tax)

  • Distributions (not subject to SE tax)

S-Corp election can save thousands in taxes annually, but only if net income is high enough to justify payroll costs.

Liability Protection

Both LLCs and S-Corps offer limited liability, protecting your personal assets from business debts or lawsuits — as long as you follow corporate formalities.

Ownership & Operations

• LLCs: Any number of owners (even foreign)

• S-Corps: Max 100 U.S. citizen/resident shareholders, one class of stock

Growth Stage

• LLC is easier when just starting

• S-Corp is better when scaling past $40,000–$50,000 in annual profit

Pros and Cons of an LLC

Pros

• Simple to form and maintain

• No restriction on ownership types

• Fewer formalities than a corporation

• Flexible taxation options (can elect S-Corp later)

Cons

• Self-employment tax applies to all profits

• May pay more in taxes as revenue grows

• Less attractive to some investors

Pros and Cons of an S-Corp

Pros

• Can reduce self-employment tax burden

• Owners can take both salary + tax-advantaged distributions

• May offer better retirement tax strategies

Cons

• More IRS scrutiny and rules

• Must run payroll and file Form 1120S

• Not ideal for part-time or unprofitable businesses

When Should You Elect S-Corp Tax Status?

You should consider electing S-Corp status if:

• Your business makes $40,000+ in net profit annually

• You're the owner-operator working in the business

• You want to reduce self-employment taxes

• You're okay with running payroll and filing extra forms

You can file Form 2553 within 75 days of forming your LLC — or retroactively for a previous tax year with IRS approval.

Common Misconceptions

Misconception	Reality
“An S-Corp is a company type.”	It’s a tax election, not a legal entity
“I can’t switch later.”	You can elect S-Corp later as your business grows
“S-Corp means less taxes automatically.”	Not always — you must pay a reasonable salary

FAQs

1. Can a single-member LLC be taxed as an S-Corp?

Yes. A single-member LLC can elect S-Corp status if it meets IRS requirements.

2. When is the best time to elect S-Corp status?

When your net profit is consistently $40k–$50k+ and you’re actively involved in the business.

3. Can I start as an LLC and switch to an S-Corp later?

Yes — that’s a common strategy. You file IRS Form 2553 to change tax treatment.

4. Do S-Corps pay less tax than LLCs?

Potentially — S-Corps avoid self-employment tax on dividends, but must pay payroll taxes and run payroll properly.

5. Do both structures protect my personal assets?

Yes as long as you maintain proper records and don’t co-mingle personal and business finances.

Choose the Structure That Matches Your Growth Plan

There’s no “one size fits all” — both LLC and S-Corp have their place.

• Starting out or staying small? Go with an LLC.

• Profitable and scaling? Consider electing S-Corp for tax savings.

• Still unsure? Talk to a tax advisor or startup attorney.

Disclaimer: This article is provided for informational and educational purposes only. It does not constitute legal, financial, medical, or professional advice. Laws and regulations change frequently, and the information may not reflect the most current developments.

You should not act or rely on this content without seeking professional guidance from a qualified attorney, accountant, or licensed expert in your jurisdiction.

The author and publisher make no warranties or representations about the accuracy, completeness, or suitability of this information for your specific situation. By using this content, you agree that the author and publisher are not responsible for any losses, damages, or liabilities that may result from your reliance on the information provided.