One of the most common questions business owners ask is what an S corporation actually is and how it differs from an LLC.
What is an LLC?
An LLC, or Limited Liability Company, is a legal structure. It creates a registered business that offers limited liability protection, meaning your personal assets are generally shielded from business debts or lawsuits.
LLC status does not determine how the business is taxed. By default, a single-member LLC is taxed as part of your personal return (on Schedule C), but you can also elect to have it taxed as a partnership or corporation.
What is an S Corporation?
An S corporation is not a legal structure; it’s a tax election. Both LLCs and corporations can choose to be taxed as an S corporation by filing Form 2553 with the IRS.
This election allows owners to split their income into two parts: a salary and a distribution. The salary is subject to payroll taxes (Social Security, Medicare, and income tax), while the distribution is only subject to income tax. This can lead to significant tax savings if managed correctly.
What are the advantages and trade-offs of an S corporation?
The biggest advantage of an S corporation is the potential to reduce self-employment taxes. However, it comes with added responsibilities. You’ll need to run payroll, keep personal and business expenses separate, and file a business tax return. These requirements involve additional time and cost, which should be considered when deciding if it’s the right fit.
When does an S corporation make sense?
In general, an S corporation starts to make financial sense when your net business profit exceeds $60,000 per year. It’s a good option if your business is already established, income is stable, and you’re looking to reduce your overall tax burden.
If you’re just getting started, have fluctuating income, or want to keep things straightforward for now, sticking with a default LLC structure might be a better choice.
Need help deciding?
I offer S corporation setup and support packages tailored to service professionals. I’ll help you decide if this is the right move for your business, handle the setup process, and provide the compliance support you need to stay on track—whether you prefer to stay involved or let someone else take it off your plate.
