LLC vs S corp: which one saves more tax?
People often ask whether to choose an LLC or an S corp. The question hides a common mix-up: they are not direct alternatives.
An LLC is a legal structure
A limited liability company is created by filing with a state. It separates your personal assets from the business for most liabilities. By default, the IRS taxes a single-member LLC like a sole proprietorship and a multi-member LLC like a partnership.
An S corp is a tax status
“S corporation” describes how the IRS taxes a business. An LLC or a corporation can elect S corp status by filing Form 2553 if it meets the requirements, such as a limit on the number and type of owners.
Where the savings can come from
Sole proprietors and partners generally pay self-employment tax on all net business income. With an S corp election, owners who work in the business must pay themselves a reasonable salary, which is subject to payroll taxes. Remaining profit can be taken as distributions, which are not subject to self-employment tax. At higher profit levels this can reduce overall tax.
The trade-offs
An S corp adds payroll, a separate tax return and stricter rules about salary and distributions. Those add accounting costs and time. At lower profits the savings may not cover them. State taxes and fees also differ, so the answer depends on where you operate.
What to do next
Estimate your state’s formation and yearly costs with our LLC cost calculator, compare federal taxes with the S corp tax savings calculator and the S corp tax calculator, then talk to a qualified accountant about the election using your real numbers. This article is general information, not tax advice.