# LLC or S corp?

Source: https://joinopenfile.com/guides/llc-vs-s-corp
Index: https://joinopenfile.com/llms.txt

An LLC is a company you form under state law. An S corporation is a federal tax status, and an eligible LLC can elect it with Form 2553 and still be an LLC in its state. The election changes how the money you take out is taxed: the IRS requires a reasonable salary for the work you do, which carries payroll tax, and the rest comes out as distributions, which don't.Updated November 4, 2026

## They aren't the same kind of thing

An LLC is created by a state. You file [articles of organization](https://joinopenfile.com/guides/articles-of-organization), pay the state's fee, and the company exists. [What an LLC is](https://joinopenfile.com/guides/what-is-an-llc) covers the rest.

An S corporation is an election with the IRS under section 1362(a). The IRS describes S corporations as corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes, and the shareholders report them on their personal returns at their individual rates. No state forms an S corporation, and nothing on your state record changes when you elect one.

So the choice people are really making is between an LLC taxed the default way and the same LLC taxed as an S corporation.

## How an LLC is taxed without the election

By default the IRS ignores a one-owner LLC for income tax, so the profit goes on the owner's return, and treats a multi-owner LLC as a partnership. Either way the owners pay self-employment tax on their share of the profit. That tax is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. For 2026 the Social Security part applies to the first $184,500 of combined wages, tips and net earnings, and the Medicare part has no ceiling. An extra 0.9 percent Medicare tax starts at $200,000 for a single filer and $250,000 filing jointly.

There's no payroll to run, and a single-member LLC files no separate business return. [LLC or sole proprietorship](https://joinopenfile.com/guides/llc-vs-sole-proprietorship) goes through the default treatment in more detail.

## What the election changes

The company files its own return, Form 1120-S, and gives each owner a Schedule K-1. Owners who work in the business go on payroll, so the company withholds and files employment taxes on Form 941 and issues a W-2. Profit above the salary comes out as a distribution, and the IRS says non-wage distributions are not subject to employment taxes.

That split is the whole argument for the election: the salary carries the 15.3 percent, the distribution doesn't. Two things don't go away. The company still owes tax on certain built-in gains and passive income at the entity level, and health and accident insurance premiums paid for an owner of more than 2 percent are reported as wages on that owner's W-2.

## Reasonable compensation is the catch

The IRS requires an S corporation to pay reasonable compensation to a shareholder-employee for the services that person provides, before non-wage distributions are made to them. Set the salary too low and the IRS has the authority to reclassify payments from distributions to wages, and it cites several court cases that back that up.

The IRS says the key is what the shareholder-employee did for the company, judged against where its gross receipts come from: the shareholder's own services, the services of other employees, or capital and equipment. Its list of factors includes training and experience, duties and responsibilities, time and effort devoted to the business, payments to non-shareholder employees, and what comparable businesses pay for similar services. Setting the number is work for an accountant, not a round percentage off a forum.

## Who can elect it

The IRS limits S corporation status to a domestic company with no more than 100 shareholders, only one class of stock, and only allowable shareholders, which may be individuals, certain trusts and estates. Partnerships, corporations and non-resident alien shareholders aren't allowed, and certain financial institutions, insurance companies and domestic international sales corporations can't elect at all. An individual and their spouse count as one shareholder for the 100 limit.

The non-resident alien rule rules the election out for many owners who live outside the US. Every shareholder also has to sign the election.

## The deadline

File Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year before that one. For a calendar-year company that already has a prior tax year, the instructions put the last day at March 15 of the year the election should start. A company in its first tax year counts 2 months and 15 days from the day that year began.

An LLC doesn't need Form 8832 first. The instructions say an entity eligible to elect to be treated as a corporation that meets the tests is treated as one as of the effective date of the S election. Miss the date and there's relief for a late election under Revenue Procedure 2013-30, which asks for reasonable cause and the words FILED PURSUANT TO REV. PROC. 2013-30 in the top margin of the form.

## What it costs to run

Payroll is the real cost. Someone has to run it, file Form 941 each quarter and Form 940 for federal unemployment tax, and issue W-2s. The 1120-S is a second return to have prepared. It's due the 15th day of the 3rd month after the tax year ends, and when no tax is due, filing late costs $255 for each month or part of a month, up to 12 months, multiplied by the number of shareholders during the year.

States don't all follow the federal election. California taxes an S corporation at 1.5 percent of its California source income on Form 100S, on top of the $800 minimum franchise tax. Ask your state's tax agency what it does with the election before you file it, and keep [the state's own LLC reports](https://joinopenfile.com/annual-report) on the calendar either way.

## Which one fits you

Stay on the default treatment if the business earns about what you would pay yourself anyway. There's nothing left to distribute, so the election buys payroll and a second return for no saving.

It starts to pay once profit sits well above a reasonable salary for your work, and it stays worth it only while that gap does. Run your actual profit, your state's treatment and the cost of payroll past an accountant. [LLC pros and cons](https://joinopenfile.com/guides/llc-pros-and-cons) covers the entity choice itself, and [best state to form an LLC](https://joinopenfile.com/guides/best-state-to-form-an-llc) covers where to form it. Nothing is lost by waiting: an LLC on the default treatment can elect S corporation status for a later year.

## Questions

Can an LLC be an S corp?

Yes. An eligible LLC files Form 2553 and is taxed as an S corporation from the effective date, with no Form 8832 first. Under state law it stays an LLC, with members, an operating agreement and the same state reports as before.

Is an S corp better than an LLC for taxes?

Not on its own. The election only helps when profit sits well above a reasonable salary for the work you do, because that gap is what comes out as a distribution instead of wages. Payroll and a second return cost money either way, so have an accountant run your numbers.

Do I have to pay myself a salary in an S corp?

Yes, if you work in the business. The IRS requires reasonable compensation to a shareholder-employee for services provided before non-wage distributions are made to that person, and it can reclassify distributions as wages when the salary is too low.

When is the S corp election due?

No more than 2 months and 15 days after the start of the tax year the election takes effect, or any time during the tax year before it. For a calendar-year company with a prior tax year the instructions put that at March 15. Late relief is available under Revenue Procedure 2013-30.

Does an S corp election change my state filings?

Not the formation record. The LLC stays an LLC and keeps its state reports. State income tax can change: California taxes an S corporation at 1.5 percent of its California source income on Form 100S, plus the $800 minimum franchise tax.

Can someone living outside the US own an S corp?

No. The IRS requires an S corporation to have no non-resident alien shareholders, so one non-resident owner rules the election out. An LLC taxed as a partnership or as a disregarded entity has no such limit.

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## Sources

- [IRS: S corporations](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations)
- [IRS: Instructions for Form 2553](https://www.irs.gov/instructions/i2553)
- [IRS: S corporation compensation and medical insurance issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)
- [IRS: Self-employment tax (Social Security and Medicare taxes)](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes)
- [IRS: Instructions for Form 1120-S](https://www.irs.gov/instructions/i1120s)
- [California Franchise Tax Board: S corporations](https://www.ftb.ca.gov/file/business/types/corporations/s-corporations.html)

## Keep reading

- [What is an LLC?](https://joinopenfile.com/guides/what-is-an-llc)
- [LLC or sole proprietorship?](https://joinopenfile.com/guides/llc-vs-sole-proprietorship)
- [LLC advantages and disadvantages](https://joinopenfile.com/guides/llc-pros-and-cons)