LLC Taxation Vs. S Corporation Taxation – What Is The Difference?

This article will explain the differences between LLC taxation and S Corporation taxation to help you make an informed decision as to which one to choose for your business.

What is an LLC?

The exact definition of LLC varies slightly from state to state. However, the essence always remains the same. A Limited Liability Company or LLC is, essentially, a business entity that is legally separate from its owners (known as “members”) and provides them with limited liability protection.

It is common for small business owners to choose to form an LLC instead of a corporation because Limited Liability Companies offer more management flexibility and usually have fewer recordkeeping and reporting requirements. Additionally, there is no limit on the number of members an LLC can have.

What is an S Corporation?

Unlike an LLC or a C corporation, an S Corporation is not a type of business entity per se. An S Corporation is a designation that refers to the way a particular business pays taxes under the Internal Revenue Code.

LLC vs. S Corporation – Taxes

The IRS classifies businesses as sole proprietorships, C corporations, S corporations, or partnerships for tax purposes. To the eyes of the IRS, there is no “LLC” tax classification, which means that LLCs need to pay taxes as though they were another type of business entity.

The IRS will automatically tax a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. However, the members of an LLC can choose to pay taxes as an S corporation or as a C corporation.

Now you may be wondering, “What is the difference between sole proprietorship LLC taxes and an LLC taxed as S corporation?” For many small businesses, the main difference between these classifications is the way business owners pay Medicare and self-employment taxes. Some LLC owners can manage to save money on these taxes by choosing to pay taxes as an S Corporation.

LLC vs. S Corporation – Which Is Better?

The way the IRS defines the S Corporation classification makes it clear that not every business will qualify for it. When it comes to single-member LLCs, most will be eligible. However, you cannot choose S Corporation taxes if your single-member LLC is:

• A foreign Company,
• Owned by a nonresident alien, or
• Owned by a partnership or corporation.

When it comes to multi-member LLCs, those that have more than 100 members will not qualify for S Corporation taxation.

To evaluate the benefits of S Corporation taxation vs. LLC taxation, you must consider whether changing to the S Corporation classification will allow you to save money. To do this, you need to set a reasonable salary for yourself, as the IRS will scrutinize owner-shareholder salaries. The next thing you need to do is ask yourself, “If I paid myself that salary, would my business have any profit left over?” If the answer is no, then S Corporation taxation may not be for you. However, if your business profits are greater than your reasonable salary, the S Corporation tax status may allow you to save money.

LLC Taxation or S Corporation Taxation – Which Should I Choose?

If you have already formed an LLC but are unhappy with the tax consequences coming your way, you can change your company’s tax status at any time during the tax year before the year you want the change to take effect, or during the first two and a half months of the current year. New businesses generally have about 75 days to choose a different tax status.

Before choosing S Corporation or LLC taxation, you must carefully evaluate the various pros and cons of the two options and seek advice from an expert from a reputable law firm like Jurado & Farshchian, P.L.

Jurado & Farshchian, P.L. can help you start the business of your dreams. Whether you decide to start an LLC or an S Corporation, we can turn the process into a simple and affordable experience for you. If you are not sure which option is right for you, our team of business experts will teach you everything you need to know to make an informed decision.

Call Jurado & Farshchian, P.L. today at (305) 921-0440 or send us an email to to get started!