This guide walks through what each actually is, the practical pros and cons, and what it means for your bookkeeping. Choosing between them is ultimately a CPA conversation — but understanding the trade-offs makes that conversation much shorter.
This is educational content, not tax or legal advice — talk to a CPA and an attorney for your specific situation.
First: what's actually being compared
When people say "S corp vs LLC," they almost always mean one of two practical comparisons:
- LLC taxed as a sole proprietorship or partnership (the default) vs. LLC that has elected S corp tax treatment
- LLC vs. corporation (the legal entity comparison, separate from tax treatment)
For most small business owners, the question is #1 — when does it make sense to elect S corp tax treatment? That's where the actual financial trade-off lives.
What an LLC gives you
Limited liability protection. An LLC creates a legal separation between you and the business. Properly structured and maintained, that separation protects your personal assets from business liabilities (with exceptions for personal guarantees, fraud, or commingling funds).
Flexibility in management and ownership. LLCs can have one or many owners (members), with flexible profit-sharing arrangements set in the operating agreement.
Default tax treatment that matches reality for most small owners. A single-member LLC is taxed by default as a sole proprietorship — meaning the LLC itself doesn't file a separate return; income passes through to your personal return on Schedule C. A multi-member LLC is taxed as a partnership by default, with each member receiving a K-1.
Relatively simple to set up and maintain. Most states have straightforward LLC formation requirements with annual fees. Florida's annual report fee is around $138.75; some states are higher.
What S corp election adds (or takes away)
S corp election is a tax choice — you elect to have your LLC (or corporation) taxed under Subchapter S of the Internal Revenue Code. The practical effect:
You must pay yourself a reasonable salary through payroll. This adds payroll administration, payroll tax filings, and the cost of running payroll. The IRS specifically requires "reasonable compensation" for owner-employees of S corps.
Distributions above your salary aren't subject to self-employment tax. This is the main reason owners elect S corp status. As a default-taxed LLC, you pay 15.3% self-employment tax on all net business profit. As an S corp, you pay payroll taxes only on your salary; distributions above that come out tax-advantaged.
You file a separate business tax return (Form 1120-S). Plus K-1s to each shareholder.
You're subject to ownership and structural restrictions. S corps are limited to 100 shareholders, all of whom must be US citizens or residents, with restrictions on what types of entities can own shares. One class of stock only.
The basic financial trade-off
The math behind whether S corp election saves money:
As a default-taxed LLC, you pay 15.3% self-employment tax on all net business profit.
As an S corp, you pay payroll taxes only on your salary portion. The distribution portion isn't subject to self-employment tax — saving roughly 15.3% × distributions = real money.
But the S corp has costs too:
- Payroll setup and ongoing payroll administration
- An additional tax return (Form 1120-S, ~$500–$1,500 from a CPA)
- More complex bookkeeping
- Higher state fees in some states (Florida is friendly here — no separate S corp state tax)
- Risk of IRS scrutiny if your salary is too low
The rough break-even for most owners is net profit around $40,000–$60,000 above your reasonable salary. Below that, the savings don't cover the added costs. Above that, the savings start to add up significantly. (More on when S corp makes sense →)
LLC pros
- Liability protection
- Simple default tax treatment for solo owners
- Flexible structure and management
- Lower compliance burden than a corporation
- Easier to set up and maintain
- No formal payroll required for owner pay
LLC cons
- All net profit subject to self-employment tax (when taxed as sole prop/partnership)
- No tax benefits beyond what a sole proprietor or partnership gets
- Can't take advantage of split salary/distribution tax savings
S corp (election) pros
- Reduced self-employment tax on the distribution portion of owner income
- Can be elected by either an LLC or a corporation
- Owner is treated as an employee, which can simplify some retirement plan setups
- Some accountants prefer the cleaner bookkeeping structure
S corp (election) cons
- Required reasonable salary adds payroll administration
- Separate corporate tax return required
- IRS scrutiny on owner salary level
- 100-shareholder limit and other ownership restrictions
- Generally not worth electing below a certain income threshold
- Switching out of S corp status has restrictions (can't re-elect for 5 years)
What it means for your bookkeeping
The bookkeeping implications matter more than most owners realize:
As a default-taxed LLC:
- Owner pay categorized as draws (equity account, not expense)
- Net profit passes through to your personal return
- No separate payroll for the owner
- Relatively simple
As an S corp:
- Owner salary runs through payroll (expense account)
- Distributions above salary are equity transactions (not expense)
- Separate accounting for salary vs. distributions
- Payroll tax filings (Forms 941, 940, W-2)
- More complex chart of accounts
- More frequent reconciliation needed
The added complexity isn't a reason to avoid the S corp election — but it is a reason to make sure your bookkeeping is solid before you make the change. (How owners get paid in each structure →)
Other considerations
State-by-state differences. Florida is friendly to both LLCs and S corps (no state corporate income tax on most entities). Other states treat them very differently — California, for example, charges an annual franchise tax on LLCs.
Industry restrictions. Some professions have specific entity rules — law firms, medical practices, certain financial services businesses may have profession-specific limitations.
Future plans. S corps have restrictions on who can own shares, which can complicate future investment or partnership scenarios. LLCs are more flexible.
State and local tax. Some states tax S corps differently than LLCs at the state level. Worth confirming before you elect.
Frequently asked questions
For most small businesses, form an LLC first. You can elect S corp tax treatment later when your income justifies it. Starting as an LLC gives you flexibility — starting as a corporation locks you into more structure than you may need.
When your net business profit is consistently above your reasonable salary by roughly $40k–$60k or more. Below that, the added cost of payroll and a corporate tax return usually eats the savings. This is a CPA conversation specific to your numbers. (More on the timing →)
Yes. You file IRS Form 2553 to elect S corp tax treatment. The form generally has to be filed by March 15 to be effective for the current tax year (with some late-election relief options). A CPA can walk you through the timing.
A C corp is taxed at the corporate level, with profits taxed again when distributed to shareholders as dividends ("double taxation"). An S corp passes profits through to shareholders, taxed only at the shareholder level. Most small businesses prefer S corp treatment to avoid double taxation. C corps make more sense for businesses planning significant outside investment, IPOs, or specific corporate tax strategies.
Where to start
The S corp vs LLC decision isn't one you should make from a blog post. It's a CPA conversation that depends on your income, your industry, your state, your retirement and benefits plans, and your future business plans. What this post can do is give you the framework to walk into that conversation already knowing the basics.
If your books aren't currently giving you accurate monthly profit numbers — which is the foundation for evaluating S corp election — that's the starting point. SoFlo360 helps small business owners keep their books clean enough to make these decisions with real numbers. Spanish-friendly support is available for owners who'd rather handle financial conversations in Spanish.
Book a free consultation or learn more about our bookkeeping services.
This post is educational content, not tax or legal advice. For your specific situation, consult a qualified CPA and attorney.