Key Takeaways

  • An LLC S-Corp tax structure allows a limited liability company to elect S corporation tax treatment to reduce self-employment taxes while maintaining pass-through taxation.
  • LLCs and S corps share liability protection and pass-through taxation but differ in ownership limits, management flexibility, and compliance formalities.
  • Electing S corp status can help LLC owners save on employment taxes if they draw a reasonable salary and take additional profits as distributions.
  • S corp status may not suit all LLCs, especially those with passive income, ineligible shareholders, or owners who prefer simple tax reporting.
  • To elect S corporation taxation, LLC owners must file IRS Form 2553 (and sometimes Form 8832) within a specific deadline.

LLC S corp tax structures are different from other types of business tax structures. Since Delaware set the framework for LLCs, in 1991, the IRS has changed their take on tax status of LLCs several times. Currently, you are able to choose how your business entity is taxed. The options are sole proprietorship, general partnership, S corporation, and C Corporation. Many people choose a partnership or sole-proprietorship. However, there are great benefits to choosing the S corp election. 

Even a room full of esteemed lawyers can debate which is better S corporation or LLC. You do not have to choose which you want to form though. You can file an LLC and elect to be taxed as an S corp. An S corporation might be the correct choice if your LLC is an active trade company and the owners are paying high SECA taxes.

By default, each entity is issued a specific taxation. For example, a multi-member LLC is taxed as a partnership, unless otherwise elected. LLCs do retain the right to taxation as a C corp or S corp. All you have to do is file the election form, IRS Form 8832, with the Internal Revenue Service. As far as the IRS, when this is done, the LLC becomes a corporation. 

Everything LLCs and S Corporations Have in Common

However, the LLC can alternately choose S corporation taxation to take advantage of some benefits. The pass-through tax deduction created by the Tax Cuts and Jobs Act makes this especially true. With both, the owners are not responsible for the debts and liabilities of the business entity. 

Both the S corporation and the LLC are formed by filing with your state. LLCs only have to file business tax returns if the LLC has more than one owner. However, both share the "pass-through" tax benefits. All necessary funds, including profits and losses, are reported on the personal tax level on the individual's tax return. There are state-mandated formalities for both, such as annual report filing and arranging to pay all necessary fees. 

Tax Flexibility and IRS Classification Options

One of the defining strengths of the LLC S-Corp tax structure is flexibility in how income is treated for tax purposes. By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a partnership. However, LLCs may elect to be taxed as an S corporation by filing IRS Form 2553, provided they meet the IRS eligibility requirements—no more than 100 shareholders, all of whom must be U.S. citizens or residents, and only one class of stock.

This election does not alter the LLC’s state-level status or limited liability protections. Instead, it allows the business to blend the operational flexibility of an LLC with the tax efficiency of an S corporation. For example, members can split earnings into a reasonable salary (subject to payroll taxes) and remaining profits distributed as dividends, which are not subject to self-employment taxes.

Differences Between S Corps and LLCs

When it comes to ownership, the IRS governs S corporation status but does not regulate LLCs. There can be an unlimited number of members in an LLC; S corporations are restricted to 100 owners or shareholders. Non-United States citizens are allowed to form LLCs but not S corps. S corporations are not owned by other S corporations, partnerships, LLCs, and most trusts. There are no restrictions on LLC subsidiaries. 

There are more internal formalities for S corps, while LLCs do not have to adhere to internal formalities. 

Recommended LLC Formalities: 

  • Adopt an operating agreement; 
  • Issue member shares; 
  • Hold and document member meetings annually; 
  • Document all major decisions.

Required S Corporation Formalities: 

  • Adopt bylaws; issue stocks;
  • Hold annual and initial shareholder meetings; 
  • Keep careful meeting minutes in the company's corporate records.

Ownership Restrictions and Compliance Requirements

An important distinction within the LLC S-Corp tax structure involves ownership and compliance. LLCs can have unlimited members, including corporations, partnerships, and foreign owners. In contrast, S corporations are limited to 100 shareholders, and all must be U.S. individuals or qualifying estates and trusts. This makes S corps less flexible for businesses with foreign investors or complex ownership structures.

S corporations also face stricter compliance duties. They must issue stock, adopt bylaws, maintain detailed corporate records, and hold annual shareholder meetings. LLCs generally have fewer formalities and rely on an operating agreement to outline member duties and management rights. Despite these differences, electing S corp taxation does not force an LLC to adopt full corporate governance—it only changes how the IRS treats its income.

Why Choose an S Corporation

When you decide to form an S corporation, you are legally an LLC, so you have fewer requirements, the Franchise Tax is fixed, and there is more flexibility in the structure of your company's management. So, in terms of tax, your business is an S corp, which means you receive corporate tax breaks, pass-through tax benefits, and there is no double taxation. 

Furthermore, the members will claim profits and losses on their income tax return personally, which is like a partnership. The most popular reasons to form an S corporation are to maintain your company's profits and remove the requirement to pay self-employment taxes.

Key Benefits of Electing S Corp Status for an LLC

Choosing an S corporation tax election for an LLC can result in significant tax savings and planning opportunities. LLC members who actively work in the business can draw a reasonable salary for their labor, which is subject to FICA payroll taxes, while the remaining profits can be distributed as dividends—avoiding self-employment tax on that portion.

Other advantages include:

  • Pass-through taxation: Profits and losses flow directly to members’ personal tax returns, avoiding double taxation at the corporate level.
  • Tax planning flexibility: Owners can time distributions to manage personal tax liability more efficiently.
  • Eligibility for the 20% Qualified Business Income (QBI) deduction under the Tax Cuts and Jobs Act for certain service and trade businesses.
  • Enhanced credibility: Some lenders and investors view S corporation status as a signal of financial formality and maturity.

However, not all LLCs benefit from S corp election. Passive income-heavy businesses or companies with ineligible shareholders may face higher administrative costs without comparable savings.

How S Corporations Are Taxed

Companies are taxed on net losses and profits, which is computed by subtracting allowable deduction expenses from total sales. The entity's tax is paid when the owners file their individual tax returns and is based on each owners percentage of ownership in the company. 

When you own an S corporation, you are paid a salary as a working owner. An S corporation is like a partnership in terms of pass-through taxation. S corps report income and deductions by filing an IRS Form 11205 information return which includes the following: 

  • Income
  • Profits
  • Deductions
  • Losses 
  • Tax Credits

All shareholders receive a Schedule-K, which lists the number of shares they own of the items on the company's Form 1120S. The owners then file Schedule E with their Form 1040 or personal tax returns showing how much of the company's profits and losses they own. The employment status of the owners is what is different between an S corp and an LLC. 

Filing Requirements and Deadlines for S Corp Election

To adopt an LLC S-Corp tax structure, the LLC must file IRS Form 2553 (Election by a Small Business Corporation), typically within 75 days of formation or the start of the tax year in which the election should apply. If the LLC has not yet been classified for tax purposes, it may also need to submit Form 8832 (Entity Classification Election) first.

Once elected, the LLC continues to file its annual Form 1120-S (U.S. Income Tax Return for an S Corporation) and issues Schedule K-1s to its members, showing each person’s share of income, deductions, and credits. Owners must ensure they receive a reasonable salary, as underpayment can trigger IRS audits or reclassification of distributions as wages.

At the state level, additional filings may be required since some states, such as California and New York, impose franchise or entity-level taxes even on S corporations. LLC owners should check with their state’s Department of Revenue to confirm compliance obligations.

Frequently Asked Questions

1. Can any LLC choose to be taxed as an S corp? 

No. Only domestic LLCs with 100 or fewer members who are U.S. individuals or qualifying trusts may elect S corp status. Corporations, partnerships, and foreign entities cannot be shareholders.

2. Does S corp status change how an LLC operates? 

No. The business remains an LLC at the state level—it only changes its tax classification with the IRS, not its legal structure.

3. How does an LLC S-Corp save on taxes? 

By splitting income into a reasonable salary and profit distributions, owners can reduce self-employment taxes on the dividend portion.

4. When should an LLC consider S corp election? 

An S corp election is often advantageous when the business generates consistent profits beyond reasonable compensation for the owner’s labor.

5. What forms are required to make the election? 

File IRS Form 2553 to elect S corp taxation. If the LLC hasn’t been classified yet, include Form 8832 to change the entity’s federal tax classification.

All of this can be pretty confusing. So it is a good idea to check with a professional CPA or a tax attorney. If you need help with LLC and S corporation tax structures, you can post your legal need on UpCounsel's marketplace. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience and work with companies like Google, Menlo Ventures, and Airbnb.