S Corp vs. LLC: Which One is Right for Your Business?

Understanding the Basics: LLC vs. S Corp
‍

What is an LLC?

A Limited Liability Company (LLC) is one of the most popular business structures due to its simplicity, flexibility, and legal protections. It combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.

LLCs are favored by small business owners because they:

• Protect personal assets from business debts and liabilities
• Avoid double taxation, as profits are reported on the owner’s personal tax return
• Offer flexibility in ownership and profit distribution
• Require minimal paperwork and compliance compared to corporations

LLC owners (called members) are subject to self-employment taxes, meaning they must pay Social Security and Medicare taxes on all business income. While this is manageable for businesses with modest revenue, it can become costly as profits grow. Many business owners consider switching to an S Corp for tax savings once their business reaches a certain level of profitability.
‍

What is an S Corp?

An S Corporation (S Corp) is not a type of business entity but a tax classification available to LLCs and corporations. Businesses elect S Corp status to reduce self-employment taxes while maintaining pass-through taxation.

To qualify as an S Corp, a business must:

• Have no more than 100 shareholders
• Be owned only by U.S. citizens or residents
• Not be owned by partnerships, corporations, or non-resident aliens
• Issue only one class of stock

S Corps allow business owners to split income between a reasonable salary (which is subject to payroll taxes) and profit distributions (which are not subject to self-employment taxes). This tax-saving strategy is one of the biggest reasons business owners choose S Corp election.
‍

Key Differences Between an LLC and an S Corp
‍

1. Tax Treatment & Self-Employment Taxes

One of the most important differences between an LLC and an S Corp is how taxes are handled.

• LLC owners pay self-employment taxes (15.3%) on all net income. This tax includes contributions to Social Security and Medicare, which can become costly as the business grows.
• S Corp owners pay self-employment taxes only on their salary. The remaining business profits are taken as distributions, which are not subject to self-employment tax.

This means that an S Corp can offer significant tax savings for business owners making over $50,000 in net profit per year. A Virtual CPA can help analyze when it makes financial sense to switch from an LLC to an S Corp.
‍

2. Compliance & Administrative Requirements

• LLCs require minimal paperwork typically just an annual report and filing fees with the state. There are no requirements for board meetings, corporate minutes, or shareholder agreements.
• S Corps must follow corporate formalities, including:
  
  • Holding annual shareholder meetings
  • Maintaining corporate minutes and records
  • Filing Form 2553 with the IRS to elect S Corp status
  • Processing payroll and W-2 filings for owner salaries

For small businesses that value simplicity and minimal paperwork, an LLC is often the preferred choice. But for those willing to take on additional administrative responsibilities in exchange for tax savings, an S Corp is a strong option.
‍

3. Ownership Structure & Profit Distribution

• LLCs offer flexibility in ownership. Business owners can distribute profits however they like, even if it doesn’t match their ownership percentage.
• S Corps have stricter rules: profits must be distributed according to shareholding percentages, and all shareholders must receive equal treatment.

This makes LLCs ideal for partnerships and businesses with non-traditional ownership arrangements, while S Corps work best for businesses with a clear, structured ownership plan.
‍

Which Structure is Right for Your Business?

Choosing between an LLC and an S Corp depends on your business goals, tax situation, and willingness to handle compliance requirements.

‍

An LLC is Best If You:

• Want simplicity with minimal paperwork and compliance
• Need flexibility in ownership structure and profit distribution
• Prefer a low-maintenance entity without corporate formalities
• Plan to reinvest profits into the business rather than take large distributions
  ‍

An S Corp is Best If You:

• Want to reduce self-employment taxes
• Have at least $50,000 in net profit per year
• Are comfortable with payroll and corporate compliance requirements
• Want to split income between a salary and distributions to optimize tax efficiency
  ‍

Can an LLC Become an S Corp?

Yes! Many business owners start as an LLC and later elect S Corp taxation when it becomes financially beneficial. To do this, you must file IRS Form 2553 and ensure your business meets the S Corp eligibility criteria.
‍

Putting it all together

Both LLCs and S Corps offer limited liability protection, tax advantages, and flexibility, but the best option depends on your business’s financial strategy.

• If you value simplicity and ease of management, an LLC may be the best fit.
• If you want to maximize tax savings, an S Corp may be worth considering.

With the rise of Virtual CPA services, business owners now have access to real-time tax planning, accounting automation, and expert guidance without needing in-person meetings. Whether you're starting a new business or considering restructuring, Anomaly CPA can help you navigate entity selection, compliance, and tax planning to ensure long-term success.

‍