LLC vs S corp: what is the difference?

What is the difference between an LLC and an S corp?

They answer different questions. An LLC is a business structure allowed by state statute, formed with your state. An S corporation is a way of being taxed: the IRS describes S corporations as corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders, who report them on their personal returns and pay tax at individual rates, avoiding double taxation. So "LLC or S corp" is often really "LLC taxed the default way, or LLC taxed as an S corporation".

For federal tax, the IRS treats an LLC by default as:

• One member: a disregarded entity, so its income goes on the owner's own return, though it is still a separate entity for employment tax and certain excise taxes.
• Two or more members: a partnership.
• By election: a corporation, using Form 8832, or an S corporation, using Form 2553.

Who can elect S corporation status?

The IRS lists these requirements. The business must:

• Be a domestic corporation, or a domestic entity, such as an LLC, eligible to elect to be treated as a corporation.
• Have no more than 100 shareholders.
• Have only one class of stock.
• Have only allowable shareholders: individuals, certain trusts and estates, but not partnerships, corporations or nonresident alien shareholders.
• Not be an ineligible corporation, such as certain financial institutions and insurance companies.

An LLC that files a timely Form 2553 and meets these tests is treated as a corporation from the election's effective date and, the Form 2553 instructions say, does not need to file Form 8832 as well. The form must be signed by all the shareholders.

How are an LLC and an S corp taxed differently?

The self-employment tax row is why people consider the election: as an S corporation, the part of the profit paid out as distributions rather than wages is not subject to employment taxes. For calendar-year S corporations the Form 1120-S due date was March 16, 2026, because March 15 fell on a Sunday.

What is reasonable compensation for an S corp owner?

This is the rule that limits the savings. The IRS says S corporations must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions, and that it can reclassify distributions as wages, with courts supporting it. The key is where the money comes from: profit generated by your own personal services should be paid as wages, while profit generated by other employees, capital and equipment can be paid as distributions.

Factors the IRS lists for judging what is reasonable include your training and experience, duties and responsibilities, time and effort devoted to the business, what comparable businesses pay for similar services, payments to non-shareholder employees, dividend history, compensation agreements, the timing and manner of bonuses, and the use of a formula. There is no safe percentage in the IRS's guidance.

When do I file Form 2553, and is the election worth it?

File Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. The IRS's example: a new calendar-year corporation whose first tax year begins January 7 must file between January 7 and March 21. A late election generally takes effect the following year, although the IRS offers relief for late elections when there was reasonable cause.

Whether it is worth it depends on numbers only you and an adviser can see. The election adds costs and duties, including running payroll for yourself, a separate Form 1120-S with K-1s, and the reasonable-compensation test, and state tax treatment varies. When profit is small relative to a reasonable salary for your work, there may be little left to pay as distributions. Talk to a tax professional before you elect, with your actual profit, your role and your state in front of you. For the earlier choice of whether to form an LLC at all, see LLC vs sole proprietorship.