Key Takeaways

  • An LLC is a legal business entity, while an S corp is a tax classification that an LLC or corporation can elect.
  • Both LLCs and S corps offer limited liability protection and pass-through taxation, but they differ in ownership restrictions, management style, and compliance requirements.
  • An S corp LLC allows business owners to combine the flexible structure of an LLC with the potential tax savings of an S corporation.
  • LLCs are generally more flexible in ownership and management, while S corps impose strict IRS rules but may reduce self-employment taxes.
  • Choosing between an LLC, S corp, or an S corp–elected LLC depends on tax goals, ownership structure, and growth plans.

Is an S Corp. an LLC?

Is an S corp an LLC? The answer is no. A limited liability Company (LLC) is different from an S corp., but they can be combined if you choose an S corp. tax classification for your LLC. An LLC is a legal entity created under state law that provides a number of personal protections to each member. The corporate structure gives your business personal protection, but it is easier to create than a corporation.

The IRS treats multi-member LLCs as a partnership, while single-owner LLCs are taxed as sole-proprietorships. With that, LLCs have the option of being taxed as an S or C corporation. This is attainable by filing an election document via the IRS, and you will receive the requested classification. The IRS will see your LLC as a corporation whenever you file your tax documents.

What Is an S Corp LLC Election?

While an LLC and an S corporation are not the same, an LLC can elect to be taxed as an S corp. This process does not change the LLC’s legal structure—it remains an LLC under state law—but alters how the IRS treats the business for tax purposes.

By filing IRS Form 2553, an LLC may choose S corp status if it meets eligibility criteria. This move can reduce self-employment taxes, since owners who work in the business are treated as employees, receiving a “reasonable salary.” The remainder of profits can then be distributed as dividends, which are not subject to Social Security and Medicare taxes.

This combination, often called an S corp LLC, allows small business owners to keep the flexibility of an LLC while taking advantage of some corporate tax savings.

S Corp Request

Most LLC owners choose the default LLC tax structure. Like the LLC tax method, S corps most notably come with the pass-through tax system where income and losses pass from the LLC to individual members, allowing them to file such profit and losses on their tax returns.

Single-member LLCs can be taxed as a corporation or sole-proprietorship, while multi-member LLCs may be taxed as a corporation or partnership. 

No business starts with an S classification. Rather, you must send an election document to the IRS to request S corp registration. The form to file is Form 2553.

The IRS will grant your request if:

  • Your LLC has less than 100 shareholders
  • There are no nonresident aliens in your business.
  • You have one type of stock (no preferred stock allowed)
  • No Corporations or partnerships own a piece of your LLC

Most small businesses meet the aforementioned criteria, which is why many LLCs are granted S status.

Tax Considerations for S Corp LLCs

Electing S corp taxation changes how profits and losses flow through to the owners. Instead of all profits being subject to self-employment tax, as in a default LLC, only the salaries paid to member-employees are subject to these taxes.

Key tax considerations include:

  • Reasonable Compensation Rule: The IRS requires owners who actively work in the business to receive a fair market wage. Paying too little can trigger penalties.
  • Payroll Requirements: Once an LLC elects S corp status, it must handle payroll taxes and withholdings for owner-employees, which can increase administrative costs.
  • Pass-through Benefits: Profits (beyond salaries) pass through to members’ personal tax returns without federal corporate tax, potentially lowering the overall tax burden.

LLC and S Corp Similarities

Similarities include:

  • Limited Liability Protection: Under both structures, members are not personally liable for any liabilities or debts incurred from the business
  • Separate Business Entities: Both form distinct legal entities that are separate from the owners
  • Pass-through Taxation: S corps and LLCs allow members to record profits and losses on their personal tax returns. Both entities do not face a double tax, as is the case with C corps.
  • Mandated Requirements: Both Entities are subject to certain formalities, such as fees and filing annual reports

While an S corp can fall under an LLC, there are differences and similarities you should be aware of. Further, each state has its own rules regarding corporate law, which is why it is always best to contact an account or attorney to see which structure is ideal for your business.

Moreover, S corps and LLCs can take advantage of pre-tax expenses in the form of:

  • Uniforms
  • Travels
  • Phone Bills
  • Advertising
  • Promotions
  • Car Expenses
  • Healthcare Costs

Advantages of an S Corp LLC

An LLC taxed as an S corporation offers several potential benefits:

  • Self-Employment Tax Savings: Members can split income between salary and dividends, reducing payroll tax obligations.
  • Retirement and Benefits Options: S corps allow certain tax-deductible benefits like health insurance premiums and retirement plan contributions.
  • Enhanced Credibility: Operating as an S corp may provide more credibility with investors or lenders than a sole proprietorship or default LLC.
  • Pass-through Deduction: Owners may qualify for the 20% Qualified Business Income (QBI) deduction, lowering taxable income.

LLC and S Corp Differences

S corps differ from LLCs in regards to the employment status of the owners. LLC owners are taxed as a partnership, but are not considered employees of the LLC for tax reasons. In essence, the member is strictly the owner. On the other hand, an S corp owner who plays a major role in the corporation will be an employee and owner under tax guidelines. An S corp owner is the owner (shareholder) and an employee that performs vital duties for the corporation.

Unlike S corp, LLCs come with the following benefits:

  • LLCs can have as many members as possible whereas S corps are restricted to no more than 100 shareholders
  • Non-U.S. citizens can become members of an LLC. S corps do not allow non-U.S. citizens as members
  • LLCs can be owned by other LLCs, corporations and partnerships
  • There are no LLC restrictions on subsidiaries.

Further, S corps come with a number of restrictions in the form of:

  • Adopting bylaws
  • Stock issuance
  • Annual meetings
  • Recording meeting minutes

For LLCs, you may adhere to the following recommendations, but they are not mandatory:

  • Drafting an Operating Agreement
  • Issuance of Membership Shares
  • Recording Annual Meetings
  • Documenting Major Company Decisions

Drawbacks of Choosing S Corp Status

Despite the tax benefits, there are important downsides to electing S corp status for an LLC:

  • Ownership Restrictions: An S corp cannot have more than 100 shareholders, and all must be U.S. citizens or residents. LLCs, by contrast, allow foreign owners and other entities to hold membership.
  • Administrative Burden: S corp LLCs must run payroll, issue W-2s, and maintain more detailed records than a default LLC.
  • Increased IRS Scrutiny: The IRS closely monitors S corps for compliance with the reasonable salary requirement.
  • Limited Flexibility in Allocating Profits: Unlike LLCs, which can distribute profits in different ratios regardless of ownership percentages, S corps must allocate income strictly in proportion to share ownership.

Management Differences

LLC owners can have managers who run various aspects of the LLC. The managers are also called members, and it is run like a partnership. If a team of managers run the LLC, it is more closely aligned with a corporation. However, they will not be involved in everyday business decisions.

S corps are governed by a board of directors, with officers managing the business. The directors reside over business affairs while making important decisions for the company. Instead, officers are managers who run the day-today operations.

Which Is Right for Your Business?

The decision between a default LLC, an S corp, or an S corp–elected LLC depends on business size, growth goals, and how owners want to be taxed.

  • Choose an LLC if you want maximum flexibility in ownership, management, and profit distribution.
  • Choose an S corp LLC election if you want to reduce self-employment taxes and can comply with IRS salary and shareholder rules.
  • Choose a corporation with S corp election if you anticipate outside investors but still want pass-through taxation.

Because the tax and compliance implications are significant, consulting with an accountant or business attorney is recommended. If you need guidance, you can find experienced attorneys on UpCounsel to help determine whether an S corp LLC is the right fit for your business.

Frequently Asked Questions

  1. Is an S corp an LLC?
    No. An LLC is a legal business entity, while an S corp is a tax classification that an LLC or corporation can elect.
  2. Can an LLC be taxed as an S corp?
    Yes. By filing IRS Form 2553, an eligible LLC can elect S corp taxation while remaining an LLC under state law.
  3. What are the benefits of an S corp LLC?
    The main benefits include potential self-employment tax savings, eligibility for the 20% QBI deduction, and access to certain tax-deductible benefits.
  4. What are the disadvantages of S corp LLC status?
    Restrictions on ownership, mandatory payroll requirements, and IRS scrutiny on reasonable salaries are common drawbacks.
  5. How do I decide between an LLC and an S corp?
    The choice depends on factors such as your income level, number of owners, and tax goals. Many small business owners consult an attorney or tax advisor before deciding.

Is an S corp an LLC? You can find out more by submitting your legal inquiry to our marketplace. UpCounsel’s team of top lawyers will assist you in deciding whether an S corp or LLC is the right choice for your business. Our lawyers will also guide you through the tax process, including any filing procedures you need to be aware of.