S Corp vs. LLC — What’s the difference? What’s best for my business?

Those are the kinds of questions you might be asking yourself about LLCs and S Corps. And these are essential questions to ask because you want to choose the proper structure for your business.

While the terms LLC and S Corp are often thrown together, they refer to different aspects of your business. LLC stands for limited liability corporation, while S Corp is a tax classification. That means you can form an LLC and have it taxed as an S Corp, or you can have your LLC operate under the default taxation for LLCs.

Person working on laptop surrounded by paper, calculator and pens

This guide will tell you what you need about both terms, their differences, and which is right for your business.

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

What Is an LLC?

LLC stands for “limited liability company,” and it’s a legal entity that can be formed to own and operate a business. The “limited liability” part protects the business owner if they’re sued or have legal troubles. It’s a way to separate yourself from your business.

Setting your business as an LLC is a popular structure for sole proprietors (single owners) or partnerships because it’s a pass-through entity. That means profits from the business “pass-through” to the owner of the LLC. The owner or owners report profits on their personal tax returns and are taxed at the owner’s personal tax rate.

However, LLCs can also be taxed as an S Corp, which means the owner or member is paid a salary that is reported as a business expense ahd having payroll taxes deducted from there. The remaining business profits are distributed as dividends.

But before you decide an LLC is right for you, here are some characteristics of an LLC you should be aware of:


There are a few different ways that ownership of an LLC can work, but the place to start is that owners of an LLC are referred to as “members.” One or multiple members can own the LLC, and members can be individuals, business entities, or both. Members may be U.S. citizens, non-U.S. citizens, or reside outside the U.S.


The owners, or members, of the LLC will need to set up an operating agreement when they form the LLC. It outlines business functions like financials and operational rules, regulations, and provisions. This document dictates the day-to-day operations of the LLC.

One of the benefits of LLCs is that operations can be much simpler than other business structures. For example, the LLC owners aren’t required to conduct annual meetings or maintain records of meetings.

If you set your LLC up as an S Corp, your business will have to meet some specific requirements, but overall, LLCs are incredibly flexible for business owners.

Related: Best Savings Account For Your Business | Top 6 Options for 2024 and How to Handle Taxes for Your Side Hustle

Management structure

LLCs can be member-managed or manager-managed. In member-managed LLCs, all members play an active role in the company’s day-to-day management, and all members are authorized to make decisions on behalf of the business. This structure is similar to a partnership, and most commonly used by small businesses.

Manager-managed LLCs are run by managers that are chosen to run the business. In some states, the delegated manager can be a third-party non-member. Or the manager can even be a third-party entity rather than an individual. The reason you might choose a manager-managed LLC is if you want to be more of a passive investor, if you lack management skills or experience, or if too many people own the LLC.


LLCs allow for pass-through taxation, meaning business income goes through the LLC and directly to the owners. Here’s how this works if there are single or multiple owner of the LLC:

  • If there is a single LLC owner, they’re typically taxed as sole proprietors and any profits, losses, or deductions are reported on the individual LLC owner’s tax return.
  • For LLCs with multiple owners, it’s taxed as a partnership. This means each other reports profits and losses on their personal tax return.

LLCs help business owners avoid corporate income tax or double taxation.

Now, there is the option to have your LLC taxed as a corporation, and some LLC owners save money by electing S Corp tax status. You must pay yourself a reasonable salary — this is what you’re taxed on — and the remainder of the business profits are distributed as dividends.

What Is an S Corp?

An S Corp is short for S Corporation, which is a kind of tax election that, unlike traditional C corps, doesn’t pay corporate income tax. This can prevent your business from incurring double taxation— one of the reasons why some LLCs elect for S Corp taxation.

Like an LLC, S Corps separate the owner’s business from their personal assets. This gives the owners protection because only business assets would be gone after a lawsuit or collector.


There are more limitations for an S Corp vs. LLC. S Corps are limited to 100 shareholders or less — shareholders are considered the owners of an S Corp. Shareholders must be U.S. citizens or permanent residents. They can include 501(c)(3) nonprofits and even certain kinds of trusts, but another for-profit corporate entity cannot own them.


S Corps have much stricter operational requirements when you compare them to LLCs. S Corps, in most states, must create articles of incorporation and adopt corporate bylaws that define how the business operates. Even though the operational documents are more rigid, the purpose is to limit disputes between shareholders.

Corporate bylaws should include things like how stock shares are distributed, procedure for meetings, how to amend bylaws and articles of incorporation, and record keeping practices.

Another key operational distinction is that S Corps must conduct annual shareholder meetings, keep track of meeting minutes, and record them for the future.

Management structure

S Corps are required to have a board of directors to oversee the company’s management and make any major corporate decisions. Corporate officers are also required, and they manage the day-to-day operations.


Shareholders of an S Corp are paid a salary and the business pays their payroll taxes — added benefit as the business owner because taxes can be deducted as a business expense, lowering the company’s taxable income. Leftover business profits are distributed to shareholders as dividends, which have a lower tax rate than regular income.

Related: Self-Employed Retirement Plans | What Are Your Options in 2024?

What Is the Difference Between LLC and S Corp?

If you’re looking at an LLC vs. S Corp, there are a number of differences to consider as the business owner. The most important to remember is that an LLC is a business structure, while an S Corp is a tax classification, meaning you can set your LLC up as an S Corp

Here’s a rundown of more differences between S Corp and LLC:

  • Ownership: S Corps are limited to 100 shareholders, must be U.S. citizens or be permanent residents, and cannot be owned by for-profit entities. LLCs can be owned U.S. citizens, non-U.S. citizens, or reside outside the U.S. LLCs can also be owned by businesses.
  • Operations: LLCs require an operating agreement, but overall, they have much more flexible operational requirements. S Corps require articles of incorporation and corporate bylaws.
  • Management: LLCs can be member-managed or manager-managed. S Corps must have a board of directors and corporate officers.
  • Taxation: LLCs are pass-through entities, meaning profits pass through to owners as business income, and then taxed as personal tax rate. Electing to have S Corp status means the S Corp pays the owners a salary and pays payroll taxes, then leftover profits are paid out to shareholders as dividends. S Corps can have tax benefits for both owners and the business.

Which Is Better, LLC or S Corp?

There’s no one-size-fits-all answer here. Most entrepreneurs will be safe starting as an LLC because you’ll gain liability protection and tax write-offs. Liability is one of the major benefits of an LLC as it separates your personal finances and assets from your business ones. LLCs are also generally cheaper to administer and easier to organize — both good for new and smaller businesses.

Electing to be taxed like an S Corp might make more sense as your business grows and you’re paying more in taxes. You can still pay yourself a realistic salary, but reduce the amount of self-employment taxes you pay because your monthly dividends are taxed at a different rate.

Another reason to elect for an S Corp is to bring on investors or share the ownership of your company with employees.

Should I Have My LLC Taxed as an S Corp?

Honestly, it depends. The main benefit is that the owner doesn’t take on all of the business income on their personal tax return. You also don’t have to pay self-employment tax on your income as an owner from the corporation. This can be especially beneficial if you’re at a higher tax bracket or have a very profitable LLC.

You’ll still have to pay taxes on net earnings and dividends. The paperwork to have S Corp status is also more intensive, potentially more expensive, and you’ll have to adhere to stricture business guidelines.

LLC vs. S Corp: The Final Word

Setting your business up as an LLC is a great starting point for any entrepreneur, and many business owners won’t need to worry about S Corp status until their business starts to grow.

If you’re on the fence about it, get in touch with an accountant who can look at your specific situation to determine whether or not you’ll reap the benefits of S Corp status.


Is it better to have an S corp or LLC?

For a smaller less complex business, an LLC is generally the better structure.

Does an S corp pay taxes?

One of the benefits of an S corp is that they do not pay federal income taxes.