Understanding the Difference Between an LLC and an S-Corp for Tax Purposes

Choosing the right business structure is more than just a legal decision—it directly impacts your taxes, liability, and long-term success. Many small business owners debate between forming a Limited Liability Company (LLC) or electing S-Corporation (S-Corp) status. Here’s what you need to know.

LLC vs. S-Corp: Key Differences

✅ Taxation – LLCs are typically pass-through entities, meaning profits are taxed at the owner’s personal income tax rate. However, an LLC can elect to be taxed as an S-Corp, allowing business owners to take some income as distributions, reducing self-employment taxes.
✅ Ownership Restrictions – S-Corps have strict limits: no more than 100 shareholders, all of whom must be U.S. citizens or residents. LLCs offer greater flexibility in ownership and can have an unlimited number of members.
✅ Management Structure – LLCs can be member-managed (owners handle operations) or manager-managed (owners appoint a manager). S-Corps must have a board of directors and officers to oversee business operations.

LLC Taxed as an S-Corp: A Middle Ground

Some business owners want the flexibility of an LLC but also want to reduce self-employment taxes, so they elect for S-Corp taxation. Here’s how it works:

• The LLC remains a legal LLC but files taxes as an S-Corp with the IRS.
• Business owners pay themselves a reasonable salary, subject to self-employment tax, but take additional profits as distributions, which are not subject to self-employment tax.
• This structure can save thousands in taxes, but it also comes with stricter compliance requirements, including payroll and tax filings.

Common Mistakes to Avoid

• Assuming an LLC always provides better tax benefits—sometimes, an S-Corp election is the smarter choice.
• Not reassessing entity status as your business grows.
• Forgetting that S-Corp compliance requirements are stricter than LLCs, including payroll obligations and formal meetings.

How Edwards Law Can Help

Choosing the wrong entity could cost you thousands in taxes. At Edwards Law, we help business owners select the right structure to maximize tax savings and legal protection. Contact Edwards today and schedule a consultation today to optimize your business strategy.