So "LLC vs S corp" comes down to one question: should an LLC keep its default tax treatment, or elect to be taxed as an S corporation by filing Form 2553 with the IRS? The election changes only federal tax. Under state law the business is still an LLC, with the same liability protection and the same operating agreement.
When does an S corp election save money?
The only saving is the Social Security and Medicare tax on the part of the profit paid out as distributions instead of salary. Against it stand the costs of running payroll, quarterly and annual payroll filings, state payroll and unemployment accounts, a separate business tax return, and in some states extra state tax or fees on S corporations. Whether the trade pays depends on:
- The profit left after a reasonable salary. If a fair salary for the work you do would take most of the profit, there is little left to pay as distributions and little to save.
- What "reasonable" means for your work. The IRS looks at your training and experience, duties, time spent, and "what comparable businesses pay for similar services," among other factors. Paying yourself a token salary to maximize distributions is what the IRS reclassifies as wages.
- The added costs, federal and state. The SBA notes that most states follow the federal treatment, but some tax S corporation profit above a limit and some do not recognize the election at all (SBA: choose a business structure).
There is no official profit figure at which the election starts to pay; any number quoted online is an estimate built on assumptions about salary, state and costs. Run your own numbers with a tax professional before filing.
Default LLC and S corp, row by row
| LLC, default tax treatment | LLC taxed as an S corp | |
|---|---|---|
| Formation | Articles of organization filed with the state | The same state filing, then Form 2553 with the IRS |
| Liability | Owners generally not personally liable for business debts | No change: the election affects tax only |
| Federal income tax | One owner: on the owner's return. Two or more: partnership return (Form 1065), profit passed to owners | S corporation return (Form 1120-S), profit passed to owners on Schedule K-1 |
| Social Security and Medicare | Self-employment tax on the owners' share of the profit | Payroll taxes on the salary paid to working owners; not on distributions |
| Paying the owners | Owner's draws; the profit is taxed whether or not it is taken out | A reasonable salary through payroll, plus distributions |
| Who can own it | Anyone: individuals, companies, foreign owners | Up to 100 shareholders, only individuals, certain trusts and estates, no nonresident aliens |
| Paperwork and cost | The state's yearly report and fees where it requires them; no separate federal return for a one-owner LLC | The same, plus payroll filings and a separate business tax return every year |
Is an S corp an LLC?
Not as such: "S corporation" is a federal tax classification, and both a corporation and an LLC can hold it, while under state law the business stays whatever it was formed as. The IRS instructions for Form 2553 say an entity eligible to be treated as a corporation that files a valid S election is treated as a corporation from the election's effective date and "doesn't need to file Form 8832," the separate classification form (IRS Form 2553 instructions).
How an LLC is taxed if it does nothing
By default, the IRS treats an LLC with one member as disregarded, so its income goes on the owner's own return, and an LLC with two or more members as a partnership (IRS: LLCs). In both cases the owners who work in the business pay self-employment tax, the 15.3% Social Security and Medicare tax for people who work for themselves, on their share of the profit. The Social Security part stops at a yearly earnings limit that the IRS adjusts each year.
What changes when an LLC elects S corp status
- Owners who work in the business become employees. The IRS says S corporations "must pay reasonable compensation to a shareholder-employee in return for services" before taking distributions (IRS: S corporation compensation). That salary goes through payroll, with withholding and payroll taxes.
- The rest of the profit can be paid as a distribution. Distributions are not wages, so Social Security and Medicare tax does not apply to them. Income tax still does: all the profit passes through to the owners' personal returns either way.
- The business files its own return. An S corporation files Form 1120-S and gives each owner a Schedule K-1 (IRS: S corporations).
Who can elect S corp status
The IRS lists the tests: the business must be domestic, have no more than 100 shareholders, have only individuals, certain trusts and estates as shareholders (no partnerships, corporations or nonresident aliens), and have only one class of stock (IRS: S corporations). For an LLC that means every member must be an eligible shareholder, so an LLC owned by another company or by a nonresident alien cannot elect. One class of stock means all ownership interests must carry identical rights to distributions and liquidation proceeds, so an operating agreement that splits profit differently from ownership can be a problem.
How and when to file Form 2553
- Deadline. No more than 2 months and 15 days after the start of the tax year the election should take effect, or at any time during the year before (IRS Form 2553 instructions).
- Signatures. Every shareholder (every member, for an LLC) must consent.
- Late filing. Relief is available in some cases if the delay had reasonable cause; the instructions explain how.
- No fee for the election itself. The IRS says it generally answers within 60 days.
The LLC needs an EIN first; see how to get an EIN. Switching to S corporation taxation does not require a new EIN (IRS: when to get a new EIN).
Can you undo an S corp election?
Yes, by revoking it, and it also ends if the business stops qualifying. Coming back is slow: the IRS instructions say that after a termination or revocation, IRS consent is generally needed to elect again before the fifth tax year after the one in which it ended.
For the corporation side of the same choice, see S corp vs C corp; for an LLC with one owner, single-member LLC taxes. What forming the LLC costs in each state is in LLC cost by state.
General information, not legal or tax advice. Facts checked 2026-10-26 against the official sources linked above; confirm with the state or the IRS before you file. How we check our facts · Report an error