📋 Feature-by-Feature Comparison
| Feature | LLC | S-Corp |
|---|---|---|
| Liability Protection | Full personal asset protection | Full personal asset protection |
| Self-Employment Tax | All profits subject to SE tax (15.3%) | ✅ Only salary subject to SE tax — distributions are exempt |
| Tax Flexibility | ✅ Can elect to be taxed as sole prop, partnership, S-Corp, or C-Corp | Fixed S-Corp tax treatment only |
| Ownership Restrictions | ✅ Unlimited members, including foreign nationals and other entities | Max 100 shareholders, US citizens/residents only |
| Profit Distribution | ✅ Flexible — can distribute disproportionately to ownership % | Must be proportional to stock ownership |
| Stock Classes | N/A — uses membership interests | Only one class of stock allowed |
| Annual Compliance | ✅ Minimal — no board meetings required | Must hold annual meetings, keep minutes, elect directors |
| Payroll Requirements | ✅ No payroll required (unless S-Corp election) | Must run payroll for owner-employees with "reasonable salary" |
| Venture Capital Readiness | VCs typically prefer C-Corps | VCs typically prefer C-Corps |
| Best For | Small businesses, real estate, solopreneurs | Profitable businesses with $50K+ net income wanting SE tax savings |
🎯 When to Choose LLC vs S-Corp
🏢 Choose LLC When:
- Net income is under $50,000/year
- You want maximum operational flexibility
- You have foreign investors or entities as members
- You want disproportionate profit distribution
- You prefer minimal compliance requirements
- You're in real estate (pass-through losses are valuable)
⚡ Choose S-Corp When:
- Net income consistently exceeds $50,000-$60,000
- You want self-employment tax savings
- All owners are US citizens/residents
- You have fewer than 100 shareholders
- You can afford payroll costs and additional compliance
- You're planning to pay yourself a reasonable salary
The most popular structure for profitable small businesses is an LLC with S-Corp tax election (IRS Form 2553). This gives you LLC's operational flexibility + S-Corp's SE tax savings. Read more in our LLC Operating Agreement guide.
📊 Self-Employment Tax: The Key Difference
The primary financial difference between an LLC and S-Corp is how self-employment (SE) tax is applied. SE tax is 15.3% (12.4% Social Security + 2.9% Medicare) and applies to all earnings subject to it.
All net business income is subject to 15.3% SE tax. No way to separate “salary” from “distributions.”
Only “reasonable salary” is subject to payroll taxes. Remaining profits distributed as “distributions” avoid SE tax.
For a deeper understanding of how entity structure affects taxation, see our guides on pass-through taxation and double taxation.
❓ Frequently Asked Questions
What is the difference between an LLC and S-Corp?
An LLC is a business structure offering liability protection and tax flexibility. An S-Corp is a tax election that can be made by LLCs or corporations. The key benefit of S-Corp status is the ability to split income between salary (subject to payroll taxes) and distributions (not subject to SE tax).
When should I elect S-Corp status?
Consider S-Corp election when net income consistently exceeds $50,000-$60,000 annually. Below that threshold, the additional payroll and compliance costs typically outweigh the SE tax savings.
Can an LLC be taxed as an S-Corp?
Yes. File IRS Form 2553 to elect S-Corp tax treatment for your LLC. This is the most popular entity structure for profitable small businesses, combining LLC flexibility with S-Corp tax benefits.
What is a "reasonable salary" for an S-Corp?
The IRS requires S-Corp owner-employees to pay themselves a salary that is reasonable for their role and industry. Factors include comparable salaries, training, experience, and time devoted to the business. Setting salary too low triggers IRS scrutiny.