Choosing the right business structure is one of the most important decisions you’ll make as a small business owner. The two most common options for new entrepreneurs are LLCs (Limited Liability Companies) and S Corporations (S Corps). Each has its advantages, drawbacks, and ideal use cases—so how do you choose the best one for your business in 2025?
In this guide, we’ll walk you through a detailed side-by-side comparison of an S Corp vs. LLC, covering everything from taxes and legal protection to flexibility and long-term growth. By the end, you’ll understand the pros and cons of each, and whether it’s time to make the switch—or stay the course.
What Are LLCs and S Corps?
Before comparing the two, it’s important to understand what they are—and how they’re different.
What Is an LLC?
A Limited Liability Company (LLC) is a legal entity that protects its owners (called “members”) from personal liability for business debts and lawsuits. It offers flexible management and tax treatment, making it a popular choice for startups and solo entrepreneurs.
Key Features:
- Simple to form and manage
- Legal separation between you and your business
- Can be taxed as a sole proprietorship, partnership, or corporation
What Is an S Corporation?
An S Corporation is a tax classification—not a type of legal entity. It’s a special election you can make after forming an LLC or corporation, allowing you to pass business income directly to shareholders while avoiding double taxation.
Key Features:
- Offers potential tax savings on self-employment taxes
- Owners are called shareholders
- Must meet strict IRS requirements to qualify
✅ Quick Note: An LLC can elect to be taxed as an S Corp. So, choosing between LLC and S Corp is often really a question of whether your LLC should remain default-taxed or elect S Corp status.
LLC vs. S Corp: Side-by-Side Comparison (2025 Update)
| Feature | LLC | S Corp |
|---|---|---|
| Formation | File Articles of Organization with the state | Form an LLC or corporation, then file IRS Form 2553 to elect S Corp status |
| Owners | Called “members” | Called “shareholders” (limited to 100) |
| Taxation | Pass-through by default; taxed on entire net income | Pass-through with potential tax savings via salary/distribution split |
| Self-Employment Tax | 15.3% on full net income | Only applies to salary, not distributions |
| Profit Distribution | Flexible | Based on ownership % |
| Management Structure | Flexible; can be member- or manager-managed | Board of directors, officers, formalities required |
| Ownership Restrictions | Unlimited members; foreigners allowed | Must be U.S. citizens or residents; max 100 shareholders |
| Fringe Benefits | Generally more flexible | Limited benefits for owners holding over 2% of stock |
Pros and Cons of an LLC
✅ Pros of an LLC:
- Simplicity: Easy to form and manage with fewer state and IRS requirements.
- Flexible Taxation: Can be taxed as a sole proprietorship, partnership, C Corp, or S Corp.
- Fewer Formalities: No requirement for annual meetings or board resolutions.
- Personal Liability Protection: Shields your personal assets from lawsuits or debts.
- No Ownership Restrictions: Non-U.S. citizens or other entities can be members.
❌ Cons of an LLC:
- Self-Employment Tax Exposure: Owners pay 15.3% self-employment tax on all profits.
- Less Tax Optimization: Compared to an S Corp, LLCs may pay more in taxes once profitable.
- Outside Investment Challenges: LLCs can be harder to structure for venture capital or equity investment.
📌 Best Use Cases for LLCs:
- New solo entrepreneurs or partnerships
- Freelancers and consultants
- Side hustles or early-stage startups
- Business owners who want flexibility and simple compliance
Pros and Cons of an S Corp
✅ Pros of an S Corp:
- Self-Employment Tax Savings: You only pay self-employment tax on your “reasonable salary,” not on total profits.
- Attractive to Profitable Businesses: More money can be taken out via distributions with reduced tax liability.
- Perpetual Existence: Like a corporation, an S Corp can outlive its owners.
- Ownership and Equity Structure: Easier to split ownership among shareholders.
❌ Cons of an S Corp:
- Strict IRS Requirements: Must file IRS Form 2553 and meet all eligibility rules.
- Limited Ownership: Only 100 shareholders allowed and no foreign investors.
- More Paperwork: Annual meetings, officer appointments, and more recordkeeping required.
- Reasonable Salary Requirement: The IRS may audit if you take too little in salary and too much in distributions.
📌 Best Use Cases for S Corps:
- Businesses generating $60K+ in net profits annually
- Entrepreneurs planning to pay themselves and save on taxes
- Service businesses with minimal outside investment needs
- U.S.-based owners only (no foreign shareholders)
LLC vs. S Corp: Taxation Deep Dive
Taxes are often the deciding factor in choosing between an LLC and S Corp—especially in 2025, when small business tax planning is more important than ever.
How LLCs Are Taxed
- By default, single-member LLCs are taxed as sole proprietorships.
- Multi-member LLCs are taxed as partnerships.
- All profits are reported on your personal tax return and subject to income tax and self-employment tax (15.3%).
How S Corps Are Taxed
- You must pay yourself a reasonable salary, subject to payroll taxes.
- Remaining profits can be distributed as dividends, which are not subject to self-employment tax.
- This can result in thousands in annual tax savings once your business turns a profit.
Example Comparison (2025 Numbers):
Let’s say your business nets $100,000 in profit in 2025:
| Structure | Self-Employment Tax |
|---|---|
| LLC | $100,000 × 15.3% = $15,300 |
| S Corp | $50,000 salary = $7,650; $50,000 distribution = $7,650 total |
That’s a $7,650 tax savings with an S Corp—enough to justify the added admin costs.
Bonus: Can You Be Both an LLC and an S Corp?
Yes! This is one of the most misunderstood facts about business structures.
You can form an LLC with your state and then file an S Corp election with the IRS (using Form 2553). This gives you the best of both worlds:
- Legal protection and flexible ownership (LLC benefits)
- Self-employment tax savings (S Corp benefits)
This hybrid structure is common among growing small businesses.
Frequently Asked Questions (FAQs)
Do I need to choose an S Corp or LLC when I register my business?
No. You register an LLC or corporation with your state. The S Corp is a tax status you elect later using IRS Form 2553.
Can a single-member LLC elect S Corp status?
Yes. Single-member LLCs can elect S Corp status as long as they meet IRS eligibility.
When should I switch from an LLC to an S Corp?
Typically, when your net profits exceed $60,000 annually and you plan to pay yourself a salary. At that point, the tax savings often outweigh the added complexity.
Can I have investors in an S Corp?
Only up to 100 U.S.-based individuals. No corporations, partnerships, or foreign investors are allowed in S Corps.
What happens if I don’t file Form 2553 on time?
You may lose your ability to elect S Corp status for that tax year unless you qualify for late election relief. It’s best to consult with a business attorney or CPA to file correctly.
Which One Is Right for You?
Here’s a simple breakdown to help you decide:
| Choose an LLC If… | Choose an S Corp If… |
|---|---|
| You’re just getting started | You’re making $60K+ in net profit |
| You want simple management | You want to reduce self-employment taxes |
| You prefer flexibility | You’re ready for payroll and bookkeeping requirements |
| You have foreign partners | All owners are U.S. citizens/residents |
Not Sure What’s Best for Your Business? LawTask Can Help.
Choosing between an LLC and S Corp can be confusing, but it doesn’t have to be. At LawTask, we specialize in helping entrepreneurs, freelancers, and small business owners like you select and set up the best business structure for long-term success.
✅ We’ll explain your options in plain English
✅ Handle state filings and S Corp elections
✅ Coordinate with your CPA for tax planning
✅ Offer flat-fee pricing with no hidden costs
Ready to protect your business and optimize for tax savings in 2025?
👉 Book a business structure consultation now or Request pricing to get started.
Your business deserves the right foundation. Let LawTask help you build it.
