LLC vs. S Corp: What’s the Difference?

Choosing between an LLC and an S corp can be a crucial decision for your business, affecting everything from taxes to daily operations. Both offer unique advantages, catering to different business needs and situations.

Understanding the main differences is key to choosing the right structure and tax status for your business.

In this article, we explain what LLCs and S corps are, including their pros and cons to help you make an informed decision about the option that best aligns with your business goals.

For more information on starting a business, explore our helpful resources.

Short on time? Here are the key takeaways

• A limited liability company (LLC) is a business structure offering limited liability and pass-through taxation (where business income is not subject to federal income tax and is instead taxed at the owner's personal income tax rate).
• An S corporation (S corp) is a tax status certain businesses can elect if they meet the eligibility requirements. This status also allows for pass-through taxation.
• The right choice between an LLC or S corp status (or an LLC with S corp status) depends on your business’s circumstances and goals.
• It’s essential to seek professional financial and legal advice before deciding.

Limited liability company (LLC) explained

An LLC is a business structure that limits owners’ personal liability and offers flexible tax arrangements.

It’s important to note that rules for forming and operating an LLC vary between states.

Generally, the law treats an LLC as a separate legal entity from its owners. This means the business itself can sue and be sued and take on debt, while owners’ personal assets, such as homes and cars, are protected from business liabilities.

For tax purposes, LLCs are, by default, pass-through entities, avoiding the double taxation corporations pay. LLCs are taxed like sole proprietorships or partnerships—business income passes to the owners who declare it on their personal tax returns and pay self-employment (Medicare and Social Security) taxes. However, LLCs can also elect to be taxed as S corps or C corps.

Other LLC features include:

• Owners are called members and can be individuals or entities, including foreign corporations.
• LLCs can have one owner (single-member) or many (multi-member), with no limit on the number of members.
• Members can manage the business themselves (member-managed) or appoint managers (manager-managed).
• LLCs require few formalities. They typically have an operating agreement outlining how they’re organized and run, including profit distribution. Profits don’t have to be distributed equally or proportionately to ownership percentage.

How to form an LLC

The rules and steps for forming an LLC vary between states but generally follow these stages:

1. Choose a business name. This name must not already be used, and you usually must register it with the relevant state formation agency. To confirm your business name is unique, check with the US Patents and Trademark Office and your state formation agency.
2. File articles of organization. Articles of organization contain basic information about your business, including its name, owners, and registered agent to create it formally. You can request this document from your state formation agency (see this example from California).
3. Apply for a federal employer identification number (EIN). This number is used for federal tax purposes.
4. File a beneficial ownership information (BOI) report. This form notifies the federal government of your business ownership arrangements.
5. Draft an operating agreement detailing how your LLC will work.
6. Apply for any necessary business licenses and open a business bank account. The
   Small Business Administration provides guidance on the licenses you may need. A separate account is good practice for keeping your business and personal finances apart.
7. Register to do business in other states. You may need to register if you operate in another state or sell products or services there. Check with the formation agencies in those states.

LLC pros and cons

Like any business structure, LLCs have their advantages and disadvantages.

Pros

• Limited liability. LLC owners aren’t personally liable for the business’s debts and liabilities.
• Pass-through taxation. By default, LLCs don’t pay federal income tax on business profits. Members pay self-employment taxes on them in their personal tax returns.
• Flexible ownership and management. LLCs can have one or multiple members, with few restrictions on who can be a member. Owners can either manage the LLC themselves or appoint separate managers.
• Fewer formalities. LLCs don’t need to adopt bylaws, conduct annual meetings, or prepare meeting minutes like corporations.

Cons

• Restricted transfer of ownership. While S corps transfer ownership via the sale of shares, LLC ownership changes typically must be approved by all members.
• Self-employment taxes. Members usually pay self-employment taxes on business income, which can be higher than the taxes S corp shareholders pay.
• Mandatory dissolution. Some states require an LLC to dissolve when a member dies or goes bankrupt.
• Limited fundraising. LLCs can’t sell shares like an S corp to attract new investors.

S corporation explained

An S corp is not a business structure but a specific tax status for eligible C corporations (C corps). The term “S corp” refers to Subchapter S of the Internal Revenue Rules, which regulates how S corps are taxed.

Eligibility requirements for S corp status include:

• A maximum of 100 owners (shareholders).
• Shareholders must be individuals or certain trusts or estates. They can’t be partnerships, corporations, or foreign citizens.
• Only a single class of stock is allowed.
• The business must be a US entity, and it can’t be a bank or insurance company.

S corp shareholders receive profits based on their ownership percentage and aren’t involved in the daily management of the business. Instead, a board of directors oversees the business and appoints officers to manage day-to-day operations.

S corps must follow strict management and reporting procedures, including conducting annual director and shareholder meetings, adopting bylaws, and issuing stock.

Like LLCs, S corps offer limited liability and pass-through taxation.

If it meets the eligibility requirements, an LLC can elect to be taxed as an S corporation. Depending on your business's circumstances, this scenario may offer tax advantages.

How to file for S corporation status

These are the general steps to follow when filing for S corp status:

1. Create your business as an LLC or C corp. To do this, file articles of organization (for an LLC) or articles of incorporation (for a corporation) with the
   relevant state agency.
2. Apply for an
   EIN
   for federal tax purposes.
3. Confirm your business meets the
   eligibility requirements
   for S corp status.
4. Submit
   Form 2553, Election by a Small Business Corporation, to the Internal Revenue Service (IRS). To claim S corp status for the current tax year, you must file the form within two months and 15 days of the tax year.

S corporation pros and cons

Here are some factors to consider when deciding whether to elect S corp status.

Pros

• Pass-through taxation. Like LLCs, S corps avoid double taxation on business profits. Instead, they pass on to the shareholders, who declare and pay tax on them at the personal rate.
• Potential tax benefits. S corp owners can be classified and paid as employees, which may reduce their tax burden compared to self-employment taxes owed under an LLC.
• Limited liability protection. Shareholders aren’t personally liable for the business’s debts and liabilities.
• Easy transfer of ownership via the transfer of shares.

Cons

• Ownership restrictions. Unlike LLCs, S corps have several ownership limitations.
• More complicated taxes. While electing S corp status may reduce overall taxes, the accounting is more complex and may increase accounting costs. As a result, LLC owners often consider S corp status only when the business is making higher profits.
• Increased compliance. Corporations must have a board of directors and officers, create bylaws, hold regular shareholder and director meetings, and maintain specific business records.

In summary: Which structure is better for you?

Choosing between an LLC and an S corp depends on your business’s circumstances. Both limit owners’ liability and offer pass-through taxation. While S corp status can offer a more favorable tax arrangement, it comes with increased formalities and compliance requirements, and your business must meet strict eligibility criteria.

When deciding whether to form an LLC or elect S corp status, it’s essential to speak to a financial or legal advisor who can explain the nuances and guide you on the best choice for your business.

Want to learn more about starting a business? Visit
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for helpful articles on business structures, insurance, and more.

Disclaimer

This article is an informational overview and is not intended as legal or financial advice. Whether an LLC or S corporation is right for your business can vary based on individual circumstances and the relevant laws, which change regularly. While we aim to provide current and reliable information, we cannot guarantee the completeness or accuracy of this information. We strongly recommend consulting with a qualified attorney or financial advisor to address your specific needs and ensure compliance with all relevant laws.