Tax Advantage of LLC Over S Corp

By Tom Streissguth

When researching the best legal structure for your small business, you may consider a limited liability company, or LLC, and an S corporation. Both LLCs and S corporations protect owners from personal liability for debts, and pass through their income to owners who then pay personal income taxes on those earnings. These entities have many similarities, and a few important differences, when it comes to taxation.

Business Structure

Both the LLC and the S corporation avoid corporate income taxes. The LLC is somewhat simpler in structure and in its burden of paperwork and regulation. Members of LLCs can decide how they will distribute income, while S corporations must distribute dividends according to the number of shares owned by their shareholders. LLC members may also deduct business losses on their personal income tax returns.

Self-Employment Taxes

However, for federal tax purposes, LLC members are considered to be self-employed, and must pay self-employment income tax, which amounts to 15.3 percent of their net income after expenses and legal write-offs. This SE tax covers Social Security and Medicare payroll taxes, which would otherwise be paid 50/50 by an employee and an employer.

Ready to start your LLC? Start an LLC Online Now

S Corporation Taxation

S corporation owners only pay the SE taxes on their salaries, not on their dividends or distributions from income. The IRS requires that a reasonable salary be paid, and will disqualify excessive distributions that are used in place of salary in order to escape the SE tax. As a result of this tax treatment, S corporations are also responsible for keeping track and paying one-half the payroll tax, which is shared with employees. This presents an additional bookkeeping task and a possible fine from the IRS if the payroll taxes are not submitted on time.


LLCs are normally classified as sole proprietorships or partnerships. But LLC members have the option of adopting the federal tax treatment of a C corporation or an S corporation. If they choose to use one of the latter classifications, they must file Form 2553 with the IRS and elect this option by March 15 of the tax year. The states have varying tax laws that, in some cases, force owners of S corporations to pay corporate income taxes as if the business operated as a C corporation. Consult an experienced business attorney in your state of operation for a full explanation of the tax law and treatment of LLCs and S corporations.

Ready to start your LLC? Start an LLC Online Now
The Tax Advantages of LLCs Over S-Corporations


Related articles

Can a Chapter C Corporation Carry Over to a Personal Tax Return?

Once you file the appropriate documentation to create a legal corporation in your jurisdiction, state and federal law will recognize the corporation as an independent entity. For federal tax purposes, the entity is subject to income tax under Subchapter C of the Internal Revenue Code and is referred to as a “C corporation.” Since Subchapter C treats corporations as distinct taxpayers, the net income or loss doesn’t carry over to the personal tax returns of shareholders.

Is a Corporation the Same as an LLC?

At one time, there were only three options for company organizers choosing a form of business organization: the sole proprietorship, the partnership and the corporation. Then in the 1970s, the limited liability company (LLC) was introduced in some states. As of 2010, LLCs are authorized by all 50 states and the District of Columbia. It is similar to the corporation in some ways and different in others.

What Are the Benefits of a S Corp Vs. an LLC?

Minimizing tax obligations and limiting legal liability are among the most important factors to consider in choosing a legal structure for your business. Depending on your particular circumstances, either an "S corporation" or a limited liability company, also called an LLC, may provide the most advantageous structure for your business.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Distributions to LLC Members Vs. Dividends

Members of a limited liability company, or LLC, and the shareholders of a corporation are similar in that they each ...

Definition of a C-Corporation

Classification of a corporate entity as a C corporation rests entirely on whether it’s subject to the income tax rules ...

Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the ...

LLC Vs. S Corp Profit Sharing

A limited liability company, or LLC, and S corporation are both popular business structures that usually protect their ...

Browse by category
Ready to Begin? GET STARTED