S Corp vs C Corp vs LLC

If you’re deciding between an S corp vs C corp vs LLC, we’re here to make the decision easy.

All three offer limited liability. And that’s important because you shouldn’t be operating without it. Limited liability protects your house and savings, among other things.

S corp is just a tax election that LLCs can choose (when the time is right). The only time you’ll want to start a corporation is if you need to attract outside investors.

And that’s why LLCs are the most popular legal entities for small businesses in the US.

Recommended: Visit Northwest for help forming your LLC.

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An Overview of S Corps, LLCs, and Corporations

An S corp is a tax status under Subchapter S of the IRS Internal Revenue Code that you can elect for your LLC or corporation.

By contrast, an LLC is a type of business structure that provides limited liability for its members.

A corporation is also a type of business structure that provides limited liability. Unlike an LLC, a corporation is owned by shareholders and operated by a board of directors.

Below, we go into more specifics about the S corp vs LLC vs corporation.

What Is an S Corp?

According to the IRS, “S corporations are corporations (or any other entity eligible to be treated as a corporation) that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” See Internal Revenue Code 26 USC Subtitle A, Chapter 1, Subchapter S to learn more.

The S corporation tax status (also called subchapter S) is a tax designation permitted by the IRS under which business owners can choose to be taxed as employees of the company. Under the right circumstances, this could lower the company’s tax bill.

What Is an LLC?

An LLC is a US business structure that protects the owners from personal liability for the company’s debts and financial obligations. In this way, an LLC is similar to a corporation.

However, unlike a corporation, an LLC offers the pass-through taxation of a sole proprietorship or partnership. This means that the company isn’t taxed at the corporate level. Rather, the company’s profits pass through to the members, who report their share on their individual income tax returns.

If you want to protect your personal assets if your business is sued or incurs debt, forming an LLC is the simplest business structure that will do that.

An LLC’s owners are called “members,” of which there can be more than one. An LLC with one owner is called a single-member LLC, and an LLC with more than one owner is called a multi-member LLC.

What Is a Corporation?

A corporation is a type of business entity that is owned by shareholders. A board of directors runs a corporation, and, like an LLC, a corporation is registered with the state.

Corporations provide limited liability and tax benefits. However, they must follow more complicated operating procedures than LLCs.

Corporations offer the most favorable tax structure for investors.

What Is the Difference Between an S Corp, LLC, and Corporation?

There are several major differences between an S corp, an LLC, and a corporation that business owners will want to take into account when choosing a structure for their business.

In particular, these three types of businesses are taxed differently, and one might be more advantageous from a tax perspective than the others depending on your circumstances. There are other differences that are worth noting as well, which we explain below.

Tax Advantages of an S Corp

Unlike an LLC, the owners of an S corp are treated (for tax purposes) as employees of the business. This means that an S corp’s owners pay both income and FICA (Medicare and Social Security) taxes on their “reasonable salary” from the business, but they only pay income tax on distributions.

As a result, electing S corp status can save on taxes if the following are true:

The business meets S corp restrictions
The business earns enough in net profit to pay a "reasonable salary" and at least $10,000 in distributions annually
The addition of payroll and accounting costs doesn't outweigh tax advantages

A reasonable salary is any salary that someone in the same job would earn. You can find prevailing salaries for given jobs in various industries using websites like Glassdoor or the US Bureau of Labor Statistics.

Filing Taxes as an LLC

Forming your business as an LLC instead of a corporation eliminates the “double taxation” problem that corporations face.

That’s because an LLC isn’t taxed at the company level. Instead, the company’s profits pass through to the members, who pay income tax on their share of them.

Filing Taxes as a Corporation

Corporations pay a federal corporate tax rate of 21%.

How you file your taxes as a corporation depends on whether you elect S corp or C corporation (C corp) status. As discussed above, an S corp’s owners are taxed on the company’s profits at the individual level but not the corporate level.

By contrast, a C corp’s profits are taxed before being distributed to the owners and taxed again when the owners report their share of profits on their individual tax returns.

Read our guide to learn more about the differences between S corps and C corps.

For a Free Consultation with a Tax Professional

Call (801) 790-0473 or schedule a meeting here.

Other Notable Differences

There are other important differences between an LLC and a corporation.

In particular, a corporation has to follow more complex rules than an LLC. A corporation also has shares and shareholders (in most cases), a board of directors, and bylaws that govern how it operates.

Check out our What is a Corporation guide for further information.

Recommended: How to Form an LLC

Which Is Better for Your Business? S Corp vs. LLC vs. Corporation

No one business structure is best for every business. Your circumstances, business goals, and other factors will determine whether you should structure your company as an S corp, LLC, or corporation.

When to Choose an LLC for Your Business

An LLC has one major advantage over a sole proprietorship: it offers limited liability for the company’s members. That means their personal assets won’t be exposed if the company borrows money, gets sued, or otherwise incurs financial obligations.

By contrast, the owner of a sole proprietorship is personally liable for their company’s financial obligations. This can result in significant financial hardship for the owner in some cases.

The bottom line: If you want personal liability protection, choose an LLC for your business.

When to Choose a Corporation for Your Business

Although most businesses start out as LLCs, you may want to choose a corporation instead of an LLC if:

you need to carry significant profit over from tax year to tax year
you need to attract venture capitalist and investors
there is benefit in managing a complex business structure

See our What is a Corporation guide for more information.

Electing S Corp for Your LLC or Corporation

You can elect S corp status when you form a legal business structure (LLC or corporation) or after you form an LLC or corporation. However, we don’t recommend starting your business as a corporation taxed as an S corp.

This is because the S corp election eliminates many of the benefits of being a corporation, including attracting investors. In addition, S corps can only issue one class of stock and are limited to 100 shareholders.

If you are ready to start a business and want it to be taxed as an S corp, form an LLC and elect S corp status when you file your Articles of Organization. An existing LLC should only elect S corp if:

The business meets S corp restrictions
The business earns enough in net profit to pay a "reasonable salary" and at least $10,000 in distributions annually
The addition of payroll and accounting costs doesn't outweigh tax advantages

How to Start an S Corp

Starting an LLC and electing S corp tax status is easy. You can use our guides to start an LLC with S corp status yourself, or you can hire a service provider like Northwest to do it for you.

Five Basic Steps to Start an LLC and Elect S Corp Status:

Step 1: Name Your LLC. Choose a name that hasn’t been taken using our business name generator and our How to Name a Business guide.

Step 2: Choose a registered agent. This person or entity is designated to receive official documents like service of process on your company’s behalf.

Step 3: File the Articles of Organization. This document, known in some states as a Certificate of Formation or a Certificate of Organization, is used to officially register an LLC with the state.

Step 4: Create an operating agreement. This document describes your company’s ownership structure and the duties of its members.

Step 5: Get an Employer Identification Number (EIN) and File Form 2553 to Elect S Corp Tax Status.

For more, see our guide on electing S corp tax status for an LLC.

S Corp vs. LLC vs. Corporation Frequently Asked Questions

Whether an LLC or S corp is better depends on your specific situation. It only makes sense to file taxes as an S corp if there is enough net profit to pay owners a reasonable salary and at least $10,000 in annual distributions.

See our LLC vs. S Corp guide for more information.

An S corp can result in tax savings over an LLC because S corp owners are considered employees of the company and only pay FICA taxes on their “reasonable salary,” not distributions.

Check out our S Corp Taxes article for more information.

The disadvantages of an S corp can include increased IRS scrutiny, additional fees, additional payroll and accounting costs compared to an LLC, and restrictions on stock ownership.

For a more in-depth explanation, read our Why Is S Corp Election Attractive guide.

The cost of forming an LLC will vary from state to state. In general, you can expect to pay a minimum of between $50 and $500 to form your LLC and around $100 annually to maintain your LLC. These costs will increase if you hire a lawyer or use a professional service provider to form or maintain your LLC. Visit our guides on forming an LLC to set up yours.

For a complete breakdown of the costs associated with forming and maintaining an LLC - Read our article, LLC Costs By State.

For more information, see our guide What Is an LLC?

A registered agent is a person or business nominated to receive and send legal documents on your LLC’s behalf. In most states, you are required to nominate a registered agent when forming your LLC. In some states, a registered agent is known as a resident agent or agent for service of process. To learn more, read our registered agent article.

For more information, see our guide What Is an LLC?

An LLC operating agreement is a legal document that outlines ownership and operating procedures of your limited liabilitycompany. This agreement allows you to create the financial and working relations among business owners (members) and between members and managers. Having this document in place is important in the event that a dispute or lawsuit arises.

For a free LLC operating agreement template and more information - Check out our LLC Operating Agreement article.

For more information, see our guide What Is an LLC?

The Articles of Organization is the legal document you submit to your state to form your LLC. This document contains important information related to your LLC, such as your LLC's name, purpose, and the name and address of your registered agent. The Articles of Organization are also known as a Certificate of Formation or a Certificate of Organization.

For more information, see our guide What Is an LLC?

First, it’s important to note that an S corp is a tax designation — not a business structure. This means a company can be both an LLC and an S corp at the same time (i.e., an LLC that’s taxed as an S corp). Businesses that net enough profit can sometimes benefit from electing the S corp classification.

For more information, see our LLC vs. S Corp guide.

No. The default taxes for an LLC and taxes for an S corp are not the same.

With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.

With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

For more information, see our guide LLC vs. S Corp.

You can start an S corp yourself or hire a professional formation service to start an S corp for you.

Learn more in our How to Start an S Corp guide.

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.