What Is the Difference Between an LLC and an S-Corp?
Choosing between an LLC and S-Corp can save you thousands in taxes — or cost you if you choose wrong.
General information, not professional advice — see terms of use.
Both provide liability protection, but the tax treatment is the key difference.
LLC by default:
- Single-member LLC: Taxed as sole proprietorship
- Multi-member LLC: Taxed as partnership
- All net profit subject to self-employment tax (15.3%)
- Simple administration: No required meetings or payroll
S-Corporation:
- Profit split into: (1) reasonable salary to owner-employees, and (2) distributions
- Self-employment tax applies ONLY to salary, not distributions
- Creates tax savings when business profit exceeds ~$40,000–$50,000
- More requirements: payroll, quarterly taxes, corporate minutes
Example: $100,000 profit
- As LLC: ~$14,130 in SE tax
- As S-Corp with $50,000 salary: ~$7,065 in SE tax
- Annual savings: ~$7,000
An LLC can elect S-Corp tax treatment by filing IRS Form 2553 — no need to change the legal structure.
Follow-up questions
When should I convert my LLC to S-Corp taxation?
Most tax professionals suggest electing S-Corp status when net business profit consistently exceeds $40,000–$50,000/year. Below that, payroll administrative costs often exceed tax savings.
What is a reasonable salary for an S-Corp owner?
The IRS requires owner-employees to pay themselves a salary comparable to what you'd pay someone else for the same work. Setting it too low is a common audit trigger. Work with a CPA to determine the appropriate salary for your industry.
Do I still need to pay payroll taxes as an S-Corp owner?
Yes — you must pay yourself a reasonable salary, which is subject to payroll taxes (Social Security and Medicare). The S-Corp advantage is that distributions above your salary are NOT subject to these taxes. You'll also need to set up payroll, withhold taxes, and file quarterly payroll tax returns.
More small business answers
This page is general information, not professional advice, and it may not reflect the latest rules where you live. For your own situation, talk to a qualified adviser. Spotted an error? Email per@upperia.se and we will fix it.