An LLC (limited liability company) and S corporation are both business structures offering liability protection, but they differ in taxation, ownership rules, and management flexibility.
Both LLCs and S corps provide personal asset protection by separating business and personal liabilities. However, their tax treatments and operational rules differ.
| LLC | S Corporation | |
|---|---|---|
| Taxation | Pass-through (default), can elect corporate tax | Pass-through only |
| Ownership | Unlimited members (individuals, corporations, other LLCs) | Up to 100 U.S. resident shareholders (no partnerships or corporations) |
| Management | Flexible (member-managed or manager-managed) | More formal (directors and officers required) |
| Self-employment tax | All profits subject to | Only distributions subject to |
LLCs have more tax flexibility. They can be taxed as sole proprietorships, partnerships, or corporations. S corps avoid double taxation but require payroll for owners who work in the business. The IRS states that "an S corporation is a corporation that meets the IRS requirements to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code."
For example, if an LLC owner takes $100,000 in profits, all may be subject to self-employment tax. An S corp owner might take $60,000 salary (subject to payroll taxes) and $40,000 distribution (not subject to self-employment tax).
Many assume S corps are always better for taxes, but this depends on profit levels and state laws. Some states impose annual fees or franchise taxes on S corps but not LLCs. For instance, California charges an annual $800 fee for both, but Texas has no state income tax and no annual fees for either.
LLCs offer more flexibility in management and ownership. S corps provide potential tax savings for higher-income businesses but come with stricter rules. Consult a tax professional before deciding.