LLC vs. S Corporation
LLCs and S Corporations both offer liability protection and pass-through taxation, but they differ in formation requirements, ownership rules, and IRS treatment. Here is how to choose.
Entity vs Tax Classification
An LLC is a legal entity formed under state law. An S Corporation is a federal tax classification, not an entity type. An LLC can elect to be taxed as an S Corporation by filing the appropriate election with the IRS, which is why the two are often compared.
Ownership and Formality
LLCs allow flexible ownership including individuals, other LLCs, and in some cases foreign owners. S Corporations restrict ownership to U.S. individuals and certain trusts, cap shareholders at 100, and require more formal governance such as bylaws, officers, and annual meetings.
Self-Employment Tax
A common reason owners elect S Corp tax treatment is potential self-employment tax savings. The owner pays themselves a reasonable salary subject to payroll taxes, with remaining profit distributed in a way that may not be subject to self-employment tax. The IRS requires the salary to be reasonable for the work performed.
Liability Protection Is the Same
It’s worth noting that liability protection comes from the underlying entity structure (the LLC or corporation), not from the S Corp tax election itself. Electing S Corp status changes how the entity is taxed, not the liability protection it provides.
Which Fits Your Situation
Single-owner service businesses with consistent profit often benefit from the S Corp election once revenue justifies payroll administration. Investment holding entities, real estate LLCs, and multi-member ventures with flexible economic arrangements often remain default LLC taxation.
LLCs and S Corporations both offer liability protection and pass-through taxation, but they differ in formation requirements, ownership rules, and IRS treatment. Here is how to choose.
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