Key Takeaways

  • Both S corporations and LLCs offer limited liability protection and pass-through taxation, but they differ significantly in tax savings, ownership structure, and growth potential.
  • One of the biggest S corp advantages over LLC is the potential for self-employment tax savings by paying owners a reasonable salary and distributing remaining profits as dividends.
  • S corps can offer more credibility with investors and lenders and are often easier to scale, though they face stricter ownership and shareholder rules.
  • LLCs provide unmatched management flexibility, minimal ongoing formalities, and simple profit distribution structures, making them ideal for small businesses and solo entrepreneurs.
  • Choosing between an LLC and S corp should consider tax strategy, compliance complexity, ownership goals, and long-term growth plans.

S Corp or LLC Which is Better

S corp or LLC which is better is a common question amongst business owners. Before you form your business, you’ll want to know the advantages and disadvantages of operating as any type of business structure. But when it comes to the LLC and S corp, these two types of business structures do, in fact, share some similarities.

S Corp vs. LLC Similarities

There are many similarities between the S corp and LLC, including the following:

  • Limited liability protection
  • Separate legal entity
  • Pass-through taxation
  • Ongoing requirements

LLC owners and S corp shareholders enjoy limited liability protection. Therefore, they cannot be held personally liable for any debts or liabilities of the business. If a lawsuit is brought against the LLC, the plaintiffs can’t go after the owners’ personal assets, whether it’s their home, car, investments, or any other personal asset.

The LLC and S corp are separate and distinct legal entities from their owners, which is another reason personal liability protection exists. Furthermore, both entities operate as pass-through tax entities. As such, these companies don’t pay corporate income taxes but rather pass all profits, losses, credits, and deductions onto their owners who report it on their personal income tax returns. The business generally still files an information tax return, which specifically identifies the portion of profits that each owner is required to file on their income tax return.

Lastly, the LLC and S corp share certain ongoing state requirements, which could include filing annual reports, paying state taxes, and other requirements to the ongoing upkeep of the business.  

Key S Corp Advantages Over LLC

While both entities provide strong legal protections and pass-through taxation, there are several ways in which S corporations may offer strategic advantages over a traditional LLC, especially for growth-oriented businesses.

1. Self-Employment Tax Savings

One of the most frequently cited S corp advantages over LLC is the potential to reduce self-employment taxes. In a standard LLC, all profits are typically subject to self-employment taxes (Social Security and Medicare). However, in an S corporation, owner-employees receive a reasonable salary (subject to employment taxes), and any remaining profits are distributed as dividends, which are not subject to self-employment tax. This structure can significantly lower the overall tax burden for profitable businesses.

2. Enhanced Credibility and Funding Opportunities

S corps often appear more structured and credible to banks, investors, and partners because of their formal corporate governance requirements. This can help attract financing, build trust with stakeholders, and provide a better foundation if you plan to eventually transition to a C corporation or seek venture capital.

3. Simplified Profit Distribution

While LLC members must often allocate profits based on ownership percentages, S corps allow profit distribution strictly according to share ownership. This can streamline accounting and reduce internal disputes over how profits are divided.

4. Perpetual Existence and Easier Transfer of Ownership

Unlike some LLCs, which may dissolve if a member leaves or dies (unless otherwise stated in the operating agreement), S corporations typically continue operating indefinitely. Additionally, ownership in an S corp is represented by stock shares, which can be more easily transferred, sold, or gifted—an advantage for succession planning or bringing in new investors.

Costs of Maintaining an LLC and S Corp

Generally, it costs more money to maintain an S corp over an LLC. This is due to the additional payroll taxes and state corporate taxes that an S corp must pay. Particularly, an S corp shareholder-employee must earn a reasonable compensation that is subject to state unemployment and disability tax for the business. With regard to the compensation paid to the shareholder-employee, keep in mind that not all shareholders in an S corp need to be paid a reasonable salary. This is only required if the shareholder is also an employee of the business.

A shareholder beingan employee of the business can occur if the shareholder completes a significant amount of work for the business and contributes to the overall operation of the company. An LLC owner, however, need not pay state unemployment or disability taxes, therefore reducing the tax implications for LLCs.

A lot of states also charge a corporate tax on corporations, including the S corp. This is not the case with LLCs, as most states don’t charge any state tax on LLCs.

Compliance and Formality Differences

While S corporations do involve more compliance obligations than LLCs, these formalities can actually work in a company’s favor by strengthening legal protections and improving operational discipline. For example, S corps must hold annual shareholder meetings, maintain detailed corporate records, and file annual reports—requirements that may seem burdensome but also reinforce liability protection and corporate legitimacy.

It’s also worth noting that some of these formalities help prevent “piercing the corporate veil,” a legal scenario where a court disregards liability protection due to poor record-keeping or mismanagement. For businesses seeking long-term growth or external investment, these governance practices can become a valuable asset rather than a liability.

Factors for Choosing Between an S Corp and LLC

When determining which type of business structure is best for you, you’ll want to think about your short-term and long-term goals, along with other objectives for your business. If you want to have liability protection but also plan on finding outside investors for your business, the S corp is the right choice for you. Moreover, if you eventually want to become publicly traded and sell more than one class of stock, you’ll have to convert to a C corporation, since S corps only allow one class of stock and can’t become publicly traded.

Also, as previously noted, the S corp is not its own type of business structure. It’s a subchapter tax election within the corporate business structure. Therefore, the S corp has many other similarities with C corporation formalities.

You can also operate an LLC but elect S corp tax status for your LLC. Therefore, you will own and operate an LLC for structural purposes but simply be taxed as an S corp.

If you are looking to operate a company with fewer formalities, cheaper costs, and flexibility in management structure, then you will want to form an LLC. The LLC is also beneficial for owners who have no plans on selling stock, seeking outside investors, having ongoing meetings that require a record of meeting minutes, or other strict corporate formalities.

When an S Corp Might Be the Better Choice

Choosing between an S corporation and an LLC ultimately depends on your business’s goals, tax strategy, and growth ambitions. Consider opting for S corporation status if:

  • Tax optimization is a priority — particularly if your business generates substantial profits and you want to reduce self-employment tax.
  • Growth and scalability are on the horizon — S corps often provide a smoother path for bringing in investors or transitioning into a C corporation.
  • Succession or sale planning is part of your long-term vision — share-based ownership can simplify ownership transfers and business continuity.
  • You want to build credibility with lenders, suppliers, and partners — S corps are often perceived as more formal and established business structures.

On the other hand, if flexibility, simplicity, and minimal compliance requirements are your top priorities—especially in the early stages of business—an LLC might still be the better fit.

Frequently Asked Questions

  1. What are the main S corp advantages over LLC?
    The biggest benefits include self-employment tax savings, easier ownership transfer, enhanced credibility with investors, and potentially simpler profit distribution.
  2. Can an LLC be taxed as an S corp?
    Yes. Many businesses form as LLCs for flexibility and later elect S corp tax status with the IRS to take advantage of tax savings.
  3. Are S corps more expensive to maintain than LLCs?
    They can be. S corps have additional compliance requirements—such as payroll, corporate record-keeping, and annual meetings—that often increase administrative costs.
  4. How do ownership rules differ between S corps and LLCs?
    S corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents. LLCs have fewer restrictions and can include individuals, corporations, and foreign owners.
  5. Which is better for a small business: LLC or S corp?
    It depends on your goals. If you want simplicity and flexibility, an LLC may be ideal. If tax savings, investment potential, or long-term growth are priorities, an S corp could be a better choice.

If you need help learning about the pros and cons of an LLC and S corp, or whether you should form an LLC or S corp for your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.