An S corp is not an alternative to an LLC. An LLC is a legal entity you form with a state, and an S corp is a federal tax election you make by filing IRS Form 2553, so the real question is whether your LLC should be taxed as an S corp. Below roughly $50,000 of net profit the election usually isn't worth the extra payroll and filings, and above roughly $75,000 to $100,000 of stable, service-based profit it often is, because payroll tax then applies only to a reasonable salary. If you plan to raise venture capital, neither fits, and you want a Delaware C corp.
Best for founders forming a Delaware C-corp who want their company formed and a business account opened in the same flow, subject to approval: Rho, which forms Delaware C-corps for $400. Rho also forms LLCs for $349 all in, state filing fee included.
We assess formation options on price, what's included, and whether a business account can open in the same flow as formation.
Quick Highlights
They are not the same category. An LLC is a legal entity; an S corp is a tax election. The real question is whether your LLC should elect S corp taxation.
Self-employment tax is the whole point: 15.3% on 92.35% of profit, with the 12.4% Social Security portion capped at $184,500 of earnings in 2026.
On $150,000 of profit, an S corp election saves about $12,000 in payroll tax, but roughly $2,600 comes back as a lost QBI deduction, before you pay for payroll and a separate tax return.
Rough threshold: below ~$50,000 in profit the election is not worth it; above ~$100,000 with stable, service-based income it usually is.
Neither works for venture-backed startups. S corps cap at 100 shareholders, allow one class of stock, and cannot have fund investors.
The framing almost every article gets wrong
An LLC is a legal entity. You create it by filing with a state. It gives you liability protection and a flexible management structure.
Deciding where to register? See our guide to the best state to form an LLC.
An S corporation is a tax election. You create it by filing Form 2553 with the IRS. It changes how your business income is taxed. It is not a type of company.
Which means the real question is not "LLC or S corp." It is "should my LLC be taxed as an S corp?" You can have an LLC that is taxed as a sole proprietorship, an LLC taxed as a partnership, an LLC taxed as an S corp, or an LLC taxed as a C corp. The LLC never stops being an LLC.
One useful technical note, since this trips up even accountants: an LLC electing S corp status files Form 2553 alone. It does not also need Form 8832. The regulations treat a timely S election as automatically including the election to be classified as an association.
How an LLC is taxed by default
Structure | Default tax treatment | Forms |
|---|---|---|
Single-member LLC | Disregarded entity | Schedule C on your 1040 |
Multi-member LLC | Partnership | Form 1065 plus K-1s |
In both cases, profits pass through to the owners and are taxed at individual rates. There is no entity-level federal income tax.
And in both cases, the owner's share of profit is subject to self-employment tax.
Self-employment tax, which is the whole ballgame
Self-employment tax is 15.3%, made up of:
12.4% Social Security, applied to net earnings up to the annual wage base, which is $184,500 for 2026
2.9% Medicare, with no cap
You pay it on 92.35% of your net self-employment earnings. There is an additional 0.9% Medicare surtax on wages and self-employment income above $200,000 for single filers and $250,000 for married filing jointly.
Half of your self-employment tax is deductible above the line, which softens the blow but does not eliminate it.
This is the tax that the S corp election is designed to reduce.
How the S corp election reduces it
When your LLC elects S corp status, you become an employee of your own company. You split what used to be one number into two:
A reasonable salary, paid through payroll, subject to FICA
Distributions of remaining profit, subject to no FICA and no self-employment tax
The payroll taxes only apply to the salary portion. That is the entire mechanism.
The worked example
A single-filer consultant with $150,000 in net business profit.
As an LLC taxed as a sole proprietorship:
```
Net profit $150,000.00
x 92.35% $138,525.00 net earnings from self-employment
Social Security $138,525 x 12.4% $17,177.10 (under the $184,500 base)
Medicare $138,525 x 2.9% $4,017.23
SELF-EMPLOYMENT TAX $21,194.33
Deductible half $10,597.16
```
With an S corp election, $60,000 salary and $90,000 in distributions:
```
Social Security $60,000 x 12.4% $7,440.00
Medicare $60,000 x 2.9% $1,740.00
TOTAL FICA $9,180.00
Payroll tax on $90,000 distribution $0.00
```
Payroll tax saved: $12,014.33.
The offset nobody mentions
That $12,014 number is what most articles stop at. It is not the whole story, because the S corp election shrinks your qualified business income deduction.
Section 199A lets you deduct up to 20% of qualified business income. For 2026, the IRS threshold amounts are $201,750 for single filers and $403,500 for joint filers; above them, limits based on W-2 wages and the type of business start to phase in.
Wages are not qualified business income. So paying yourself a salary moves money out of the QBI base:
```
As a sole proprietorship:
QBI = $150,000 - $10,597.16 (half of SE tax) = $139,402.84
Deduction at 20% = $27,880.57
As an S corp:
QBI = $150,000 - $60,000 (wages) - $4,590 (employer FICA) = $85,410.00
Deduction at 20% = $17,082.00
QBI deduction lost = $10,798.57
Income tax cost at a 24% marginal rate = $2,591.66
```
There is a second, smaller offset. As a sole proprietor you deduct half of your self-employment tax ($10,597.16). The S corp deducts only the employer half of FICA ($4,590). That $6,007.16 difference costs another $1,441.72 at a 24% marginal rate.
Net benefit before compliance costs: roughly $7,981.
Then subtract what the election costs you to maintain: a payroll service, a separate Form 1120-S, and in some states and cities an additional entity-level tax on S corps, or no recognition of the S election at all. Check your state's rules before you count the savings.
So on $150,000 of profit, the election is worth less than the $12,000 headline: roughly $8,000 before compliance costs, and less once you pay for payroll, tax preparation, and any state-level tax.
The reasonable salary problem
"Reasonable" is not a number you get to choose freely. The IRS instructions state that distributions to a corporate officer must be treated as wages to the extent they represent reasonable compensation for services rendered, and the IRS can recharacterize distributions as wages when the salary is implausibly low.
Factors the IRS weighs include your training and experience, duties and responsibilities, time devoted to the business, what comparable businesses pay for similar work, and whether the company's revenue comes from your personal services or from capital and other employees.
The practical guidance: pay yourself what you would have to pay someone else to do your job. A founder taking a $20,000 salary on $200,000 of profit from a personal-services business is inviting IRS scrutiny.
When each one makes sense
Stay an LLC without the election if
Your net profit is under roughly $50,000. The savings will not cover payroll and tax prep.
Your income is volatile. Payroll obligations are rigid; a bad year with a fixed salary is uncomfortable.
You want minimum administration. No payroll filings, no Form 1120-S, and no payroll tax deposits.
You reinvest most of your profit rather than taking it out.
Your business is capital-intensive rather than service-based, which weakens the reasonable-salary case.
Elect S corp status if
Your net profit is comfortably above $75,000 to $100,000 and reasonably stable.
Your reasonable salary is meaningfully less than total profit, so there is a real distribution to shield.
You are already running payroll, so the marginal admin cost is small.
Your state does not claw the benefit back with its own entity-level tax.
Do neither if you are raising venture capital
Neither structure works for a venture-backed startup, and this is worth stating plainly because founders lose months to it.
S corporations may have no more than 100 shareholders, may issue only one class of stock, and may not have partnerships or corporations as shareholders. A venture fund is itself a partnership, which makes it a categorically ineligible S corp shareholder. Preferred stock requires a second class, which S corps cannot have.
If you expect a term sheet, you want a Delaware C corporation. See C corp vs S corp for startups for the full reasoning, and how to incorporate a startup for the setup.
If you have already reached that conclusion, Rho forms Delaware C-corps for $400. See Where Rho fits below for what that includes.
How and when to file the election
File Form 2553 with every required shareholder's signed consent and an authorized officer's signature. The deadline is no more than two months and fifteen days after the beginning of the tax year the election takes effect, or any time during the preceding tax year.
Miss it and there is relief: the IRS may grant late election relief for reasonable cause within three years and 75 days of the intended effective date. You'll need to explain the reasonable cause and have shareholders confirm they reported income consistent with the election, so filing on time is simpler.
Once elected, your company files Form 1120-S and issues a Schedule K-1 to each shareholder every year.
Side by side
LLC (default) | LLC with S corp election | |
|---|---|---|
Legal entity | LLC | LLC |
Federal tax treatment | Sole prop or partnership | S corporation |
Payroll tax | 15.3% on 92.35% of profit | FICA on salary only |
Owner paid via | Owner draws | Salary plus distributions |
Payroll required | No | Yes |
Tax return | Schedule C or Form 1065 | Form 1120-S plus K-1s |
QBI deduction base | Full profit less half of SE tax | Profit less wages and employer FICA |
Ownership limits | None | 100 shareholders, one class, no partnership or corporate owners |
Good for VC | No | No |
Where Rho fits
Whichever structure you choose, the legal entity has to exist before you can make any tax election.
When you incorporate a Delaware C-corp with Rho, it costs $400. Every formation document is reviewed by a licensed attorney, the registered agent is covered for year one, your EIN application is filed for you, and you get 83(b) election support. Your business account opens in the same flow, subject to approval. Banking, invoicing, cards, and bill pay, all live the moment your account is approved. To be eligible, a C-corp formed with Rho needs at least one US-based owner or officer, a physical US operating address, and a business in an eligible industry.
Rho also forms LLCs for $349 all in, state filing fee included.
The short version
Run the numbers on your actual profit rather than following a rule of thumb. Below roughly $50,000 in profit the election is not worth the friction. Above roughly $100,000 with a stable, service-based business, it usually is, but count the QBI offset and your state's treatment before you assume the headline saving is real.
And if you are building something you intend to raise venture capital for, this entire comparison is the wrong one. You want a Delaware C corp.