LLC vs S-Corp: what's the difference for taxes?
Updated October 22, 2026 · By the Solo Tax Optimizer team · Not tax advice
"Should I form an LLC or an S-Corp?" is a common question, but it compares two different things. An LLC is a type of legal entity created under state law. An S-Corp is a federal tax status that an eligible LLC or corporation chooses. Many small businesses are both: an LLC taxed as an S-Corp.
What an LLC is
A limited liability company is formed by filing articles of organization with your state. Its main purpose is legal: it separates the business from you personally, which can protect your personal assets from business debts and many lawsuits. That protection depends on running the LLC properly, for example by keeping separate bank accounts. It does not protect you from your own professional negligence.
How an LLC is taxed by default
- Single-member LLC: ignored for federal income tax ("disregarded"). You report profit on Schedule C exactly like a sole proprietor and pay self-employment tax on all of it.
- Multi-member LLC: taxed as a partnership. The LLC files Form 1065, and each member reports their share on a Schedule K-1. Active members generally pay self-employment tax on their share.
In other words, forming an LLC on its own does not reduce your federal taxes.
What an S-Corp election changes
When an LLC files Form 2553, it is taxed as an S-Corporation. The LLC itself stays the same under state law. What changes is how you are paid and taxed:
- You become an employee of your LLC and receive a reasonable salary through payroll.
- Remaining profit can be paid as distributions, which are not subject to Social Security and Medicare tax.
- The business files Form 1120-S and issues you a Schedule K-1.
Side-by-side comparison
| LLC (default taxation) | LLC taxed as S-Corp | |
|---|---|---|
| Liability protection | Yes | Yes |
| Self-employment / payroll tax | 15.3% on most of the profit | 15.3% on salary only |
| Payroll required | No | Yes |
| Federal business tax return | None (single-member) or Form 1065 | Form 1120-S |
| Owner restrictions | Few | Up to 100 eligible shareholders, one class of stock |
| QBI deduction | Based on all profit | Salary excluded |
| Running costs | Low | Higher: payroll, accounting, possible state taxes |
Why not just form a corporation?
A corporation (Inc. or Corp.) can also elect S-Corp status. Corporations come with more formal requirements, such as a board of directors, bylaws and annual meetings, depending on the state. For a one-person business, an LLC usually offers the same tax result with less paperwork. That is why "LLC taxed as an S-Corp" is such a common setup.
Which should you choose?
- Starting out or profit still small: a single-member LLC with default taxation is simple and cheap. Some people stay as a plain sole proprietor until they want liability protection.
- Profit growing to roughly $50,000–$100,000 or more: compare default LLC taxation with an S-Corp election using real numbers. See when to elect S-Corp status.
- Multiple owners with different economic deals: partnership taxation is more flexible, because S-Corps must split distributions strictly by ownership.
You don't have to decide everything at once. You can form an LLC now and add an S-Corp election later, when your profit makes it worthwhile.
Frequently asked questions
Can an LLC be an S-Corp?
Yes. An LLC remains an LLC under state law but can elect to be taxed as an S-Corporation by filing IRS Form 2553, as long as it meets the S-Corp eligibility rules.
Does an LLC protect me from taxes?
No. An LLC can protect your personal assets from many business debts and lawsuits, but it does not change your taxes by itself. A single-member LLC is taxed just like a sole proprietorship unless it makes a tax election.
Do I need an LLC to elect S-Corp status?
You need either an LLC or a corporation. A sole proprietor without an entity cannot file Form 2553. Most small business owners who want S-Corp tax treatment form an LLC because it is simpler to run than a corporation.
This guide explains general federal tax rules for the 2026 tax year. It is not tax, legal or financial advice. Your situation may differ, so talk to a qualified tax professional before acting on it.