LLC vs. S-Corp

Quick Definition: Business Structure vs. Tax Treatment

A business structure—like an LLC or a corporation—is the legal form of your business. It controls how the business is set up and managed.

Tax treatment is how the IRS taxes your business. An S-Corp is a tax election, not a business structure, and an LLC or a corporation can choose it if they qualify.

This means that when people compare an LLC vs. S-Corp, they’re often looking at a business structure on one side and a tax option on the other.

PROS

CONS

• Liability protection: An LLC is its own business structure, separate from the owners. This offers owners limited liability protection from business disputes.
• Flexible ownership: An LLC can have one owner or many, called members.
• Default pass-through taxes: Profits and losses usually pass through to the owners’ personal tax returns.
• Tax options available: Many LLCs can elect to be taxed as an S-Corp or C-Corp if they meet IRS rules.
• Fewer formal steps: LLCs generally have fewer requirements around meetings and recordkeeping compared to corporations.

• Formation and annual costs: Most states charge fees to form an LLC, and some require yearly filings.
• State rules vary: Requirements for reports, renewals, and fees depend on where the LLC is registered.
• Fewer options for investors: If you want investors later, it can be harder to bring them in compared to a corporation. Also, some investors prefer corporate structures for their own internal processes.

PROS

CONS

• Limited liability from the underlying entity: An S-Corp election does not change the business structure, but LLCs and corporations that choose it provide liability protection through the business entity itself.
• Special tax rules: S-Corp taxation separates owner income into wages and distributions under IRS guidelines.
• Familiar to banks and partners: Many lenders and partners are familiar with the documents and structure required for S-Corp taxation.
• Retirement options: S-Corp taxpayers may use certain retirement plans to save through the business.

• Stricter IRS rules: S-Corp owners who work in the business must receive a reasonable salary.
• Ownership limits: S-Corps can have up to 100 owners, and they must be U.S. citizens or residents.
• More structured requirements for corporations: Corporations electing S-Corp taxation typically follow formal procedures such as meetings and minutes.
• LLCs follow their own structure: LLCs electing S-Corp taxation do not become corporations; they follow LLC rules but still must meet IRS tax requirements.

TOPIC

LLC

S-Corp

Legal protection

Limited liability protection.

Comes from the underlying entity (LLC or corporation) that elects S-Corp taxation.

Taxes 

Default is pass-through; can elect S-Corp or C-Corp. 

Pass-through taxation with IRS rules on salary and distributions.

Owners

One or more members. Many states have no limit.

Up to 100 owners who must be U.S. citizens or residents.

Ongoing rules

Fewer rules, more flexible.

More rules: must hold meetings, keep minutes, etc.

Key Takeaways

• LLCs are legal business structures with flexible rules and several tax options. By default, LLCs are taxed as pass through. 
• S-Corp taxation is a specific tax election available to qualifying LLCs and corporations. Registering as a Corporation with S-Corp tax treatment means more rules — limits on owners, more paperwork, and required meetings — but can save you money on taxes depending on the situation.
• Both setups can offer limited liability through the underlying business entity.
• You can start with an LLC and switch to S-Corp taxation later if your business grows and it makes sense.