S Corp vs LLC: Which Is Better? [2026 Guide]

Side-by-Side Comparison

Feature	S Corporation	LLC
Self-Employment Tax	Only on salary (not distributions)	On all net income (15.3%)
Formation Complexity	More complex (articles + bylaws + election)	Simple (articles of organization)
Ongoing Compliance	Corporate formalities, minutes, reports	Minimal requirements
Ownership Restrictions	Max 100 shareholders, US citizens only	No restrictions
Profit Distribution	Must pay reasonable salary first	Flexible (any distribution ratio)
Tax Filing	Form 1120-S	Schedule C or Form 1065
Best For	Profitable businesses ($50K+ net income)	New businesses / flexibility seekers

Pros & Cons

S Corporation

✓ Significant self-employment tax savings
✓ Pass-through taxation (no double tax)
✓ Liability protection
✓ Can pay yourself a salary + distributions
✓ Established credibility with business partners

✗ Must pay yourself a "reasonable salary"
✗ More paperwork and compliance
✗ Payroll setup and costs
✗ IRS scrutiny on salary vs distribution split
✗ Restrictions on ownership and stock classes

LLC

✓ Simple to form and maintain
✓ Flexible profit distribution
✓ Fewer compliance requirements
✓ No ownership restrictions
✓ Can elect S Corp taxation later
✓ Operating agreement flexibility

✗ Self-employment tax on all net income (15.3%)
✗ Some states charge LLC fees/franchise tax
✗ May be seen as less established
✗ No stock options for employees
✗ Varies significantly by state

Tax Savings Example: $120,000 Net Business Income

	S Corporation	LLC
Net Business Income	$120,000	$120,000
Reasonable Salary	$60,000	N/A (all is SE income)
Distribution / Remaining	$60,000 (no SE tax)	N/A
Self-Employment Tax (15.3%)	$9,180 (on salary only)	$18,360 (on all income)
Annual Tax Savings	Baseline	$0 — pays $9,180 more

Which Is Better for You? Take the Quiz

1. Is your net business income above $50,000/year?

Yes No / Just starting out

2. Are you comfortable with additional paperwork and payroll?

Yes No, I want simplicity

3. Do you need flexibility in ownership or profit sharing?

Not critical Yes

4. Do you plan to bring on investors?

Limited partners only Yes, including foreign investors

The Bottom Line

An LLC is the best starting point for most new businesses due to its simplicity and flexibility. Once your net income exceeds ~$50,000/year, electing S Corp taxation (you can do this with an LLC!) can save thousands in self-employment taxes. Many businesses start as an LLC and elect S Corp status later.

Frequently Asked Questions

Can an LLC elect S Corp taxation?

Yes! You can form an LLC and file Form 2553 to elect S Corp tax treatment. This gives you the simplicity of an LLC with the tax benefits of an S Corp.

When should I switch from LLC to S Corp?

Generally when your net income exceeds $50,000-$60,000/year and the self-employment tax savings outweigh the additional payroll and compliance costs (~$1,000-$2,000/year).

What is a "reasonable salary" for an S Corp?

The IRS requires S Corp owners to pay themselves a salary comparable to what similar roles pay in the industry. Underpaying your salary to avoid taxes is a major IRS audit trigger.

S Corp vs LLC