S-Corp vs LLC: Which One Is Right For You

The S-Corp vs LLC question comes up constantly, and most answers online make it more confusing than it needs to be. The truth is simple: an LLC is a legal structure, and an S-Corp is a tax election. You’re not choosing between two equal things, and choosing the wrong setup can quietly cost you in taxes or compliance headaches.

This guide breaks down how LLCs and S-Corps actually work, how they’re taxed, and when each one makes sense.

What Is an LLC?

An LLC (Limited Liability Company) is a legal entity, created at the state level. It determines how your business is owned and how liability is handled.

Key features of an LLC:

• Liability protection for owners
  
  
• Flexible ownership structure
  
  
• Fewer formalities than corporations
  
  
• Can be taxed in multiple ways
  
  

By default, an LLC is taxed as:

• A sole proprietorship (single-member LLC), or
  
  
• A partnership (multi-member LLC)
  
  

This default taxation is where many businesses start.

What Is an S-Corporation?

An S-Corporation is not a legal entity. It’s a tax status elected with the IRS.

Key features of an S-Corp:

• Pass-through taxation
  
  
• Owners who work in the business must be paid a salary
  
  
• Additional profits can be taken as distributions
  
  
• More payroll and compliance requirements
  
  

An S-Corp can be:

• A corporation that elects S-status, or
  
  
• An LLC that elects to be taxed as an S-Corp
  
  

This is where the comparison actually matters.

The Core Difference Most People Miss

You don’t choose LLC vs S-Corp.

You choose:

1. An LLC as your legal structure, and then
   
   
2. Whether to keep default taxation or elect S-Corp taxation
   
   

That single decision affects:

• How you pay yourself
  
  
• How much payroll tax you owe
  
  
• Your compliance workload
  
  
• Your audit exposure
  
  

How Taxes Work: LLC vs S-Corp

LLC (Default Taxation)

• All net profit flows to the owner
  
  
• Subject to self-employment tax
  
  
• No payroll required for owners
  
  
• Owner takes draws, not wages
  
  

This setup is simple, but can get expensive as profits grow.

S-Corp Taxation

• Owner must be paid a reasonable salary
  
  
• Salary is subject to payroll taxes
  
  
• Remaining profit is taken as distributions
  
  
• Distributions are not subject to self-employment tax
  
  

This structure can reduce taxes, but only when implemented correctly.

Paying Yourself: LLC vs S-Corp

This is where the decision becomes real.

LLC

• Owner’s draws only
  
  
• No payroll for owners
  
  
• Simpler bookkeeping
  
  
• Higher self-employment taxes as profits increase
  
  

S-Corp

• Mandatory payroll for working owners
  
  
• Reasonable salary required
  
  
• Distributions allowed after salary
  
  
• More payroll filings and compliance
  
  

Most S-Corp problems stem from paying the owner incorrectly.

When an LLC Usually Makes Sense

An LLC with default taxation often works well when:

• Profits are still modest
  
  
• You want minimal admin overhead
  
  
• You don’t want to run payroll yet
  
  
• The business is still evolving
  
  

This is often the right starting point.

When an S-Corp Starts to Make Sense

An S-Corp election is usually considered when:

• The business has consistent profit
  
  
• Payroll tax savings outweigh added costs
  
  
• The owner is actively working in the business
  
  
• The business can support proper payroll and compliance
  
  

This is a tax strategy, not a badge of legitimacy.

Compliance and Cost Differences

S-Corps are not “set it and forget it.”

Common Mistakes Business Owners Make

• Electing S-Corp status too early
  
  
• Not paying a reasonable salary
  
  
• Skipping payroll or filings
  
  
• Assuming S-Corp always saves tax
  
  
• Treating distributions like owner’s draws
  
  

Most of these mistakes are correctable, but rarely painless.

Final Takeaway

LLC vs S-Corp isn’t a branding decision. It’s a tax and compliance decision.

An LLC gives you flexibility and simplicity. An S-Corp can reduce taxes, but increases complexity.

The right choice depends on profit level, owner involvement, and willingness to maintain payroll compliance. If your setup no longer matches how your business actually operates, that’s usually the signal to reassess before penalties or audits force the issue.