Introduction
If you’re starting a business, you might be wondering: what is the difference between an S Corporation and an LLC? While both structures offer liability protection and flexible operations, they differ significantly in taxation, ownership rules, and legal requirements. Choosing the right one depends on your business goals.
What Is an LLC?
An LLC (Limited Liability Company) is a flexible business structure that blends the benefits of a sole proprietorship or partnership with the legal protection of a corporation.
Key Features of an LLC:
- Pass-through taxation by default
- Simple management and fewer formalities
- No ownership restrictions
- Ideal for small and medium-sized businesses
What Is an S Corporation?
An S Corporation (S Corp) is not a business entity type but a tax designation available to eligible corporations or LLCs. Businesses that meet IRS requirements can choose S Corp status to avoid double taxation.
Key Features of an S Corporation:
- Pass-through taxation with salary + distributions
- IRS requirements for eligibility
- Limits on number and type of shareholders
- Greater scrutiny from the IRS
Key Differences: LLC vs. S Corporation
| Feature | LLC | S Corporation |
|---|---|---|
| Taxation | Pass-through (default) | Pass-through (salary + dividends) |
| Self-Employment Tax | Applies to all profits | Only on salary portion |
| Ownership Restrictions | Unlimited members, any type | Max 100 shareholders, US citizens |
| Formalities | Minimal | Must adopt bylaws and hold meetings |
| Management Structure | Flexible, member- or manager-led | Structured, with officers & board |
| Profit Distribution | Any way the members decide | Must match share ownership |
Which One Should You Choose?
- LLC is great if you want flexibility, simple structure, and fewer compliance rules.
- S Corporation is ideal if you want to reduce self-employment tax and meet IRS criteria.
You can even form an LLC and elect S Corp taxation—a popular hybrid approach for growing businesses.
Final Thoughts
Understanding what is the difference between an S Corporation and an LLC? helps you pick the best structure for your goals. Each offers protection and tax benefits—but your choice should align with how you want to operate, grow, and pay taxes.
