LLC vs S-Corp: Which Is Right?

An LLC (Limited Liability Company) is a legal business structure you create by filing Articles of Organization with your state's Secretary of State. Filing fees range from $35 in Montana to $500 in Massachusetts, with the national average sitting at about $132 as of 2026.

By default, a single-member LLC is taxed as a sole proprietorship. You report all income and expenses on Schedule C of your personal Form 1040. The IRS hits all net profit with 15.3% self-employment tax (12.4% Social Security on the first $184,500 of income in 2026, plus 2.9% Medicare on all earnings).

The LLC itself offers real liability protection. Your personal assets (home, savings, car) are shielded from business debts and lawsuits. You get flexible management, unlimited members, and zero ownership restrictions. For a complete overview of how LLCs compare to other entity types, see our guide to business entity types.

An S Corp is not a type of business entity. It is a federal tax classification under IRC Section 1362 that you elect by filing Form 2553. Your LLC remains an LLC with your state. Only its IRS treatment changes.

The core benefit is the salary/distribution split. As an S Corp, you pay yourself a reasonable W-2 salary (subject to the 15.3% FICA tax), and then take remaining profits as distributions that are not subject to self-employment tax. On $100,000 of net profit with a $50,000 salary, you avoid SE tax on the $50,000 distribution, saving roughly $7,650 before compliance costs.

S Corps come with real restrictions. You are limited to 100 shareholders, all of whom must be U.S. citizens or residents. You can only have one class of stock. You must file a separate Form 1120-S tax return, issue K-1s and W-2s, and run payroll. Learn more about eligibility and formation in our guide to starting an S Corp.

The only difference that matters for most owners is taxes. Your LLC's legal protection does not change when you elect S Corp status. Your operating agreement stays the same. Your state filings stay the same. The IRS is the only entity that sees a difference.

Tax Treatment Is the Deciding Factor

A default LLC pays 15.3% SE tax on all net profit up to $184,500 (the 2026 Social Security wage base). That is $14,130 on every $100,000 of profit. An LLC taxed as an S Corp pays that 15.3% only on the owner's W-2 salary, not on the remaining distributions.

Example: You earn $150,000 in net profit. As a default LLC, your SE tax is approximately $21,194. As an S Corp with a $60,000 reasonable salary, your FICA tax is approximately $9,180. That is a difference of about $12,000. Even after $3,500 to $5,000 in added S Corp compliance costs, you net $7,000 to $8,500 in real savings.

Formation and Paperwork

Both paths start with the same LLC filing. The S Corp adds Form 2553, which cannot be filed online as of 2026. You must mail or fax it. Expect a CP261 confirmation letter from the IRS within 60 days.

Ongoing Compliance

A default single-member LLC files Schedule C on your personal return. An S Corp-elected LLC must file Form 1120-S (the S Corp return), issue Schedule K-1s to all owners, issue W-2s, run payroll at least quarterly, and file quarterly payroll tax forms (941). Budget $2,000 to $5,000 per year for a payroll service and CPA filing.

Ownership and Management

Default LLCs have no ownership restrictions. S Corps are limited to 100 shareholders, must be U.S. citizens or residents, and allow only one class of stock. If you have foreign investors or want multiple equity tiers, you cannot elect S Corp status.

Pros and Cons of Staying with Default LLC Taxation

• Pro: Simplest tax filing. Single-member LLCs report on Schedule C with no separate business return.
• Pro: No payroll required. You take owner draws, not a salary.
• Pro: No ownership restrictions. Unlimited members, foreign owners, multiple equity classes.
• Pro: Lowest compliance costs. Skip the payroll service, the 1120-S prep, and the W-2/K-1 requirements.
• Con: Full 15.3% SE tax on all net profit up to $184,500 in 2026.
• Con: Higher total tax bill once profits exceed $80K compared to S Corp.

Pros and Cons of Electing S Corp Taxation for Your LLC

• Pro: Save $5,000 to $15,000+ per year in SE tax above the $80K profit threshold.
• Pro: Better positioning for the 20% QBI deduction with W-2 wage optimization.
• Pro: Retains full LLC flexibility at the state level.
• Con: Must pay yourself a reasonable salary. The IRS reclassifies distributions as wages (plus penalties) if your salary is too low.
• Con: Added $2,000 to $5,000+ annual compliance costs (payroll, 1120-S, bookkeeping).
• Con: Ownership limited to 100 U.S. shareholders, one class of stock only.

Choosing between default LLC taxation and S Corp election comes down to your net profit, your ownership structure, and your tolerance for compliance costs. Use these if/then scenarios to find your fit.

• If your net profit is under $60K, stay with default LLC taxation. S Corp compliance costs will eat any SE tax savings.
• If your net profit is $60K to $80K, the math is close. Run a calculation with a CPA. Default LLC is often simpler and cheaper in this range.
• If your net profit exceeds $80K, the S Corp election typically saves you $3,000 to $8,000 per year after compliance costs.
• If your net profit exceeds $150K, S Corp savings accelerate to $7,500 to $15,000+ per year. This is where the election becomes a clear win.
• If you have foreign owners or want multiple equity classes, S Corp is not an option. Stick with default LLC (or consider C Corp vs S Corp for venture-funded businesses).
• If you are a freelancer just starting out, begin with a default LLC for simplicity. You can elect S Corp later when income justifies it. See our LLC for freelancers guide for specifics.

Not sure which entity type fits at all? Start with our complete guide to business entity types or compare an LLC versus a sole proprietorship first.

Converting your LLC to S Corp taxation is a one-time IRS filing. You do not need to create a new entity or change anything with your state.

Step 1. Confirm You Meet S Corp Eligibility

Your LLC must be a domestic entity with 100 or fewer shareholders, all of whom are U.S. citizens or residents. You can have only one class of stock (though voting rights may differ). Certain entities like insurance companies or DISCs are ineligible.

Step 2. Get an EIN (If You Do Not Have One)

Apply free at IRS.gov/EIN. It takes under 15 minutes and costs $0. See our EIN application guide for a walkthrough.

Step 3. Complete and File Form 2553

Download Form 2553 from IRS.gov. All shareholders must sign in Column K. The form must be mailed or faxed (the IRS does not accept electronic filing for Form 2553 as of 2026). Faxing is faster and gives you an immediate confirmation.

Step 4. Meet the Deadline

For calendar-year businesses, Form 2553 must be filed within 2 months and 15 days of the start of the tax year. For 2026, that deadline is March 17, 2026 (March 15 falls on a Sunday). New businesses get 2 months and 15 days from their formation date.

Step 5. Wait for Confirmation

The IRS sends a CP261 acceptance letter within approximately 60 days. If you have not heard back, call the IRS Business and Specialty Tax Line at (800) 829-4933. Keep your fax confirmation or certified mail receipt as proof of timely filing.

Step 6. Set Up Payroll and Compliance

Once approved, you must run payroll for yourself and any other owner-employees. Budget $50 per month for a basic payroll service. You will also need to file Form 1120-S annually and issue W-2s and K-1s. Hiring a CPA for S Corp return preparation typically costs $1,000 to $3,000 per year.

Missed the Deadline?

Late election relief exists under Rev. Proc. 2013-30. You can file up to 3 years and 75 days late with a reasonable cause statement. Write "FILED PURSUANT TO REV. PROC. 2013-30" at the top of your Form 2553.