LLC vs S-Corp: Taxes, Self-Employment & Which Wins
How an LLC and an S-Corp are taxed, why the reasonable-salary rule matters, and when the S-Corp election actually saves money.
An LLC is a legal entity; "S-Corp" is a tax election you can place on an LLC (or a corporation). By default a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership — all profit flows through to your personal return and you pay self-employment tax of 15.3% on the whole amount. Electing S-Corp treatment changes only the tax math, not the liability shield.
| Dimension | LLC (default) | LLC or corp elected as S-Corp |
|---|---|---|
| Liability protection | Full separation of personal and business assets. | Same full separation — the election does not change liability. |
| Taxation | Pass-through; all net profit is subject to 15.3% self-employment tax. | Pass-through; you must pay yourself a reasonable W-2 salary (subject to payroll tax), and take remaining profit as K-1 distributions (not subject to self-employment tax). |
| Setup cost | $50–$500 state filing; no extra election cost. | Same formation plus IRS Form 2553; adds payroll setup and filing cost. |
| Compliance burden | Low — annual report in most states. | Moderate — run payroll, file Form 1120-S, document that the salary is reasonable. |
| Equity & investor limits | Flexible membership. | Max 100 U.S. individual shareholders, one class of stock. |
| Best for | Most small businesses that want simple taxes. | Profitable owner-operated businesses where payroll + filing cost is less than the self-employment tax saved. |
When the S-Corp election saves money
The savings come from splitting income: profit paid as a W-2 salary is hit with payroll tax (the employer + employee halves add up to 15.3%), but profit taken as a K-1 distribution escapes the self-employment portion. The catch is the IRS requires a reasonable salary for the work you actually do — you cannot pay yourself $0 and call everything a distribution. A common rule of thumb is to elect S-Corp status once net profit clears roughly $40,000–$60,000, after which the payroll and filing overhead is outweighed by the tax saved. Below that, the extra admin usually costs more than it saves.
Common confusion
People often think "S-Corp" is a type of company you form. It is not — you form an LLC (or corporation) and then file Form 2553 to be taxed as an S-Corp. You keep the LLC liability shield either way.
Note: This comparison is educational reference, not legal advice (非法律建议). Entity and tax rules differ by state — confirm with a licensed attorney in your state before choosing a structure.