"S corp vs LLC" is one of the most searched questions in small business, and it contains a category error that sends founders down the wrong path. Once you see the actual structure of the choice, the decision gets much easier — and it comes down to a single number you can calculate in about five minutes.
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, and compliance costs eat more.
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.
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
Single-member LLC
Disregarded entity
Multi-member LLC
Partnership
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. Those thresholds are set in statute and are not adjusted for inflation.
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 20% of qualified business income. It was made permanent, and for 2026 the thresholds are $201,750 for single filers and $403,500 for joint filers, below which the wage and service-business limitations do not apply.
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
```
Net benefit before compliance costs: roughly $9,423.
Then subtract what the election costs you to maintain. A payroll service, a separate Form 1120-S, and in some states an additional entity-level tax — California, for example, imposes a 1.5% franchise tax on S corps with an $800 minimum, and New York City does not recognize S corp status at all. Those costs commonly run somewhere between $1,300 and $4,000 a year.
So on $150,000 of profit, the honest answer is that an S corp election is worth something in the range of $5,000 to $8,000 a year, not the $12,000 headline.
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 will recharacterize distributions as wages when the salary is implausibly low. Courts have backed this repeatedly.
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 an audit and will probably lose it.
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 separate return, no quarterly 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–$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 incorporates your Delaware C corporation for free, with a $400 refundable deposit returned once you open a Rho account and maintain a $10,000 average checking balance for 60 days. Every document is reviewed by a licensed attorney, your EIN application is filed for you, and your business account opens in the same flow. Delaware C corporations are supported today, with LLC support coming soon.
How and when to file the election
File Form 2553, signed by all shareholders. 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 grants late election relief for reasonable cause within three years and 75 days of the intended effective date. It is routine, but it is paperwork you would rather avoid.
Once elected, your company files Form 1120-S and issues a Schedule K-1 to each shareholder every year.
Side by side
Legal entity
LLC
Federal tax treatment
Sole prop or partnership
Payroll tax
15.3% on 92.35% of profit
Owner paid via
Owner draws
Payroll required
No
Tax return
Schedule C or Form 1065
QBI deduction base
Full profit less half of SE tax
Ownership limits
None
Good for VC
No
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 entity owners
Good for VC
No
No
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.
FAQs
Often yes above roughly $75,000 to $100,000 in stable profit, but the comparison is commonly framed wrong. An LLC is a legal entity and an S corp is a tax election, so the real question is whether your LLC should elect S corp taxation.
The saving comes from self-employment tax. An LLC owner pays 15.3% on 92.35% of profit, with the 12.4% Social Security portion capped at $184,500 of earnings in 2026. With an S corp election you pay FICA only on a reasonable salary, and distributions above that carry no self-employment tax. On $150,000 of profit with a $60,000 salary, that is about $12,000 in payroll tax saved.
Two offsets reduce it. Wages are not qualified business income, so your 20% QBI deduction shrinks — worth roughly $2,600 in this example — and payroll plus a separate Form 1120-S commonly costs $1,300 to $4,000 a year. The realistic net is closer to $5,000 to $8,000. Below about $50,000 in profit the election generally is not worth the administration.
No. An LLC is a legal entity you create by filing with a state, while an S corp is a tax election you make by filing Form 2553 with the IRS. The real question is whether your LLC should elect S corp taxation.
When your LLC elects S corp status, you split your profit into a reasonable salary and distributions. You pay FICA taxes only on the salary portion, and distributions above that carry no self-employment tax, which is where the savings come from.
Below roughly $50,000 in net profit, the election generally is not worth the administrative friction. Above roughly $75,000 to $100,000 in stable, service-based income, it usually is.
Two factors reduce the headline saving: paying yourself a salary shrinks your qualified business income deduction, and compliance costs for payroll and a separate Form 1120-S commonly run $1,300 to $4,000 per year. On $150,000 of profit, the realistic net benefit is closer to $5,000 to $8,000, not the $12,000 gross saving.
The IRS expects you to pay yourself what you would have to pay someone else to do your job, weighing factors like your duties, experience, and how much revenue depends on your personal services. A salary that is implausibly low relative to total profit invites an audit and will likely be recharacterized.
No. S corps are limited to 100 shareholders, one class of stock, and cannot have partnerships or corporations as shareholders, which disqualifies venture funds. Founders planning to raise venture capital should form a Delaware C corporation instead.
You file Form 2553, signed by all shareholders, no later 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. Late election relief is available within three years and 75 days of the intended effective date for reasonable cause.
No. The LLC remains the legal entity and continues to provide limited liability protection. The S corp election only changes how the business income is taxed, not the underlying legal structure.