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Last Updated :
Oct 31, 2025
LLC vs S Corp: Differences, and How to Pick the Right Fit
Choosing between an LLC and an S corp usually comes up at a turning point: you’re about to file paperwork, or you’re already running the business and wondering if a different setup would make more sense. The terms get tossed around a lot, which makes it feel like they’re interchangeable when they’re not.
An LLC (Limited Liability Company) is a business entity formed under state law. It provides liability protection for its owners (called “members”) and, by default, is treated as a pass-through entity for tax purposes. That means business profits and losses flow through to the owners’ personal tax returns, avoiding corporate-level taxation.
An S corporation (S corp), on the other hand, isn’t a separate legal entity. It’s a tax status recognized by the IRS. Both LLCs and corporations can elect to be taxed as S corps, which allows business owners to pay themselves a salary and potentially reduce self-employment taxes by taking part of their income as distributions.
Let's break down what each option really is, how they work, and how to think about which one fits where your business is headed.
What is an LLC, And How Does it Work?
A Limited Liability Company, or LLC, is one of the most common ways to set up a small business in the U.S. An LLC is often a good fit for solo founders and small teams who want to protect their personal assets, keep paperwork simple, and maintain flexibility in how their business is taxed.
LLCs don’t pay federal income tax at the company level by default. Instead, profits and losses are “passed through” to the owners, who report them on their personal tax returns. That said, an LLC can also choose to be taxed as a corporation if that’s a better fit.
Let’s say Maria runs a graphic design business that brings in $120,000 in profit after expenses. She’s the sole owner and works full-time in the business.
As an LLC (default taxation):
The $120,000 flows directly to Maria’s personal tax return.
She pays federal and state income taxes on it, plus self-employment tax (15.3%) on the full amount.
That self-employment tax alone comes to about $18,360 (15.3% × $120,000).
After paying self-employment tax, $101,640 is what’s left before her normal income tax bill (federal + state, depending on income brackets) is applied.
Pros of an LLC
Liability protection: Members’ personal assets are generally shielded from business debts and lawsuits.
Tax flexibility: Income passes through to owners, avoiding corporate-level tax. Optionally, the LLC can elect S corp or C corp taxation.
Simple management: Fewer formalities than corporations. Owners can run the business themselves or appoint managers.
Scalable ownership: LLCs can have one member or many, with individuals, companies, or even foreign investors allowed.
Cons of an LLC
Self-employment taxes: By default, members pay self-employment tax on their share of profits.
State rules vary: Costs and requirements can differ a lot depending on where you form the LLC.
Less appealing to investors: Venture capital firms usually prefer corporations, especially C corps.
What is an S Corporation and How it Works?
Once you understand the basics of an LLC, it’s easier to see how the S corporation differs.
An S corporation, or S corp, isn’t a type of business you register with the state. It’s a tax election that an eligible corporation or LLC can make with the IRS. By choosing S corp status, the company avoids paying federal income tax at the corporate level. Instead, profits and losses “pass through” to the shareholders, who report them on their individual tax returns.
The main difference from a standard LLC is how the IRS expects money to flow to owners. If you work for your S corp, you must pay yourself a “reasonable salary.” That salary is subject to payroll taxes like any other job. But profits above your salary can often be taken as distributions, which aren’t subject to self-employment tax. This setup can create meaningful tax savings for some businesses.
Let's take our previous example of Maria's business that brings in $120,000 in profit after expenses. But this time it's registered as an S corp.
As an S corp:
Maria elects S corp status and pays herself a “reasonable salary” of $70,000. That salary is subject to payroll taxes (the equivalent of self-employment tax).
The remaining $50,000 is treated as a distribution, not subject to self-employment tax. On this, she’ll pay only income tax, no payroll tax.
Payroll taxes apply only to the $70,000, which is about $10,710 (15.3% × $70,000).
That means Maria saves roughly $7,650 in self-employment taxes compared to the default LLC structure.
Both structures give Maria liability protection, but the S corp election can cut down her tax bill if she’s making consistent profits. The trade-off is extra paperwork: she has to run payroll for herself and stay compliant with IRS rules about “reasonable” salaries.
Pros of an S corp
Pass-through taxation: No corporate-level income tax; profits flow directly to shareholders.
Potential tax savings: Owners can split income between salary and distributions, sometimes lowering overall taxes.
Liability protection: Like LLCs and C corps, owners’ personal assets are generally protected.
Credibility and structure: Operating as an S corp can make a business look more formal to banks, clients, or partners.
Cons of an S corp
Eligibility limits: Capped at 100 shareholders, all of whom must be U.S. citizens or residents. Only one class of stock is allowed.
Payroll requirements: Owners working in the business must run payroll and pay themselves a fair wage.
More paperwork: Filing an S corp election, running payroll, and handling compliance adds complexity.
Less flexible for investors: Not attractive to venture capital or foreign ownership. For that you should look at creating a C corp.
What’s the Difference Between an LLC and an S Corp?
Both LLCs and S corporations give owners liability protection, but they work differently when it comes to taxes, ownership, and compliance.
Aspect | LLC | S Corporation |
Taxes | Default pass-through taxation: profits flow to members’ personal tax returns. Members pay income tax and self-employment tax on their share. An LLC can also elect corporate or S corp taxation. | Pass-through taxation: profits flow to shareholders’ personal returns. Owners who work in the business must pay themselves a salary (subject to payroll tax); profits above that are distributions, not subject to self-employment tax. |
Ownership | Flexible ownership: can have one or many members, including individuals, corporations, or foreign owners. | Limited to 100 shareholders. All must be U.S. citizens or residents. Only one class of stock allowed. |
Management | Flexible: can be member-managed (owners run the business) or manager-managed (owners appoint managers). | More structured: must have shareholders, directors, and officers, with formal payroll and compliance requirements. |
Profit handling | Profits are divided among members as agreed in the operating agreement. All profits are generally subject to self-employment tax. | Profits must be distributed in proportion to ownership. Distributions beyond salaries are not subject to self-employment tax. |
Paperwork | Generally less formal: varies by state but requires fewer filings than corporations. | More formal: requires S corp election with the IRS, running payroll, and corporate filings. |
Investor appeal | Less attractive to venture capital, but fine for small businesses and partnerships. | Not attractive to venture capital due to ownership limits and stock restrictions. |
Which One Should You Choose for Your Business?
Once you know the differences, the harder part begins: deciding what fits your business. That choice is about weighing what matters most to you right now, and where you think the business is going.
Ask yourself a few questions:
Income level: How much profit are you expecting this year? If it’s modest, the simplicity of an LLC may outweigh the possible tax savings of an S corp. If profits are higher and steady, the S corp structure may keep more money in your pocket.
Workload tolerance: Do you want to keep paperwork minimal, or are you okay with extra compliance in exchange for tax advantages?
Ownership vision: Are you planning to keep ownership tight among a small group, or do you want more flexibility down the road? S corp rules are strict, while LLCs allow wider options.
Cash flow: Would you rather keep profits in the business or take them home regularly? LLCs make it easier to decide as you go, while S corps are more rigid about distributions.
Future plans: Remember, an LLC can elect S corp status later. You’re not locked into today’s decision forever.
LLC vs S Corp: How to Decide What’s Best for Your Business?
Choosing between an LLC and an S corporation comes down to your business’s stage, income level, and long-term goals. An LLC often makes sense for new or growing businesses that want liability protection with simple management and flexible taxation. An S corp, on the other hand, can offer meaningful tax savings once profits are consistent and you’re paying yourself a regular salary. Though it comes with more paperwork and compliance requirements.
If you’re unsure which structure fits your goals, Haven can help. Our team works with founders and small business owners every day to clarify their options, plan for taxes, and handle the filings behind the scenes.
Book a free tax strategy call with Haven. We’ll review your numbers, outline your options, and help you land on the structure that supports where you want to take your business.