S Corp vs LLC: What Each One Is, How the Election Works, and How Taxes Differ

An LLC and an S corporation are not two versions of the same thing. An LLC is a business entity created under state law. An S corporation is a federal tax status that an eligible corporation, or an eligible LLC, can elect by filing IRS Form 2553 (opens in a new tab). If an LLC makes no election, the IRS generally treats a single-member LLC as disregarded and a multi-member LLC as a partnership. Electing S status brings rules on who may own the business, how many owners it may have, one class of stock, owner consent and timing. Owners who work in an S corporation must receive reasonable wages, and state taxes and filings vary.

What are you comparing?

The comparison mixes two different systems. State law decides whether your business exists as an LLC or a corporation. Federal tax law decides how the IRS taxes that business. The IRS page on limited liability companies (opens in a new tab) describes an LLC as a business structure allowed by state statute, with federal tax classification handled separately.

Internal Revenue Code section 1361 (opens in a new tab) defines an S corporation as a small business corporation for which an election under section 1362 (opens in a new tab) is in effect. Filing an LLC's formation document with the state does not create S corporation status. The election is a separate federal filing, and the LLC remains an LLC under state law after it is made. If you are still choosing whether to form an entity at all, our guide comparing an LLC and a sole proprietorship covers that earlier decision.

How does the IRS tax an LLC that makes no election?

Every LLC has a default federal classification. According to IRS Publication 3402 (opens in a new tab), a single-member LLC is generally disregarded as separate from its owner unless it elects corporate treatment. An individual owner reports the business activity on Schedule C, Schedule E or Schedule F, depending on the activity. The Schedule C instructions (opens in a new tab) explain how a single-member LLC owner reports on that form.

A multi-member LLC is generally treated as a partnership unless it elects another classification. It files Form 1065 and gives each member Schedule K-1 information. One detail applies even to a disregarded LLC: it still uses its own name and EIN for employment tax and certain excise taxes.

Can an LLC elect S corporation status?

Yes, if it qualifies. The Form 2553 instructions (opens in a new tab) list the main requirements. The business must be a domestic corporation or a domestic entity eligible to elect corporate treatment. It generally may have no more than 100 shareholders, and the shareholders generally must be individuals, estates, certain exempt organizations or qualifying trusts. It may not have nonresident alien shareholders, apart from limited statutory exceptions. It may have only one class of stock, though differences in voting rights are allowed. All shareholders must consent to the election, and certain financial institutions, insurance companies and domestic international sales corporations are not eligible.

An eligible LLC generally files Form 2553, Election by a Small Business Corporation. The instructions state that an eligible entity that elects S status this way generally does not need to file Form 8832, Entity Classification Election, first. Form 8832 is the form used when an eligible entity elects to change its federal classification, such as electing to be taxed as a corporation without the S election.

Timing matters. Form 2553 is generally due no later than two months and 15 days after the beginning of the tax year the election is meant to cover, or at any time during the preceding tax year. For a calendar-year business that wants the election to start January 1, that usually means March 15. The instructions were last revised in December 2020, so check the current IRS Form 2553 page before you file.

A late election may still qualify for relief. The Form 2553 instructions describe relief when the entity intended the election to take effect, missed it only because the filing was late, had reasonable cause, acted diligently once it found the problem, files within the allowed period and reports consistently. That period is generally three years and 75 days from the intended effective date. When those conditions are not met, the IRS states on its filing status change page (opens in a new tab) that a private letter ruling may generally be required.

How does the owner get paid?

Payment works differently after the election. A shareholder who performs services for an S corporation is generally an employee of the corporation. The IRS page on S corporation employees, shareholders and corporate officers (opens in a new tab) says officers who perform services and receive, or are entitled to, payment generally receive wages subject to federal employment taxes.

The IRS also requires reasonable compensation (opens in a new tab) for shareholder-employees before non-wage distributions are made for their services. The factors the IRS lists include training and experience, duties and responsibilities, time and effort, comparable compensation, compensation agreements, payments to non-shareholder employees and the source of the corporation's gross receipts. Wages go through payroll with withholding, Social Security, Medicare and unemployment taxes. Distributions are reported separately and cannot be used to disguise pay for services.

A default LLC works another way. The IRS page on paying yourself (opens in a new tab) explains that partners generally are not employees, so they do not receive W-2 wages for their partner payments. A single-member LLC owner generally reports the profit on Schedule C.

How does self-employment tax differ?

The federal rules point in different directions for each classification. For a default single-member LLC owned by an individual, the business profit reported on Schedule C generally counts toward self-employment tax. For an S corporation, the 2025 Schedule SE instructions (opens in a new tab) state that a shareholder's share of S corporation net income is not subject to self-employment tax. That does not remove employment taxes from the wages the shareholder-employee receives.

Whether the election lowers your total tax depends on the wage level, payroll costs, state taxes and the rest of your finances. A tax professional can run those numbers for your business.

What forms are filed each year?

The annual paperwork follows the federal classification. The table below sets out the main federal returns.

An S corporation also keeps records of shareholders, stock, basis, payroll and distributions, and watches that it still meets the eligibility rules. State income, franchise, payroll and information returns come in addition to the federal filings.

What limits apply to S corporations?

The election carries restrictions that an LLC taxed by default does not face. Section 1361 limits the number and type of shareholders, bars nonresident alien shareholders in general, and allows only one class of stock. Every shareholder must consent to the election. Failing to stay eligible can end the election.

Losses are limited too. Under Internal Revenue Code section 1366 (opens in a new tab), a shareholder's ability to deduct S corporation losses is limited by basis, and IRS Publication 542 (opens in a new tab) covers basis and distribution rules for corporations. The IRS also states in its retirement plan FAQs (opens in a new tab) that S corporation distributions are not earned income for retirement plan contributions. Built-in gains, passive income and earlier C corporation history can create corporate-level taxes or other effects.

What does Texas require?

Texas taxes the entity, whatever its federal election. The Texas franchise tax applies to covered taxable entities, including corporations and LLCs organized in Texas or doing business there. For reports due in 2024 and later, an entity at or below the no-tax-due threshold generally does not file a No Tax Due Report but must file Form 05-102, Public Information Report, or Form 05-167, Ownership Information Report, according to the Texas Comptroller's filing requirements (opens in a new tab) and its information report page (opens in a new tab). For 2025 reports, the Comptroller's 2025 franchise tax forms page (opens in a new tab) sets the threshold at $2.47 million in annualized total revenue.

Owing no tax and owing no report are different things in Texas. An LLC below the threshold may have no franchise tax due and still file its information report each year. The federal S election also does not replace Texas entity formation; the business stays a Texas LLC, corporation or other entity type.

How do California and New York differ?

Each state sets its own rules, and these two show how far they can differ from Texas.

California's Franchise Tax Board (opens in a new tab) states that S corporations doing business in, incorporated in or qualified in California generally owe an $800 minimum franchise tax, with stated exceptions, and generally file Form 100S. The 2025 Form 100S booklet (opens in a new tab) lists a 1.5% tax rate for S corporations and 3.5% for financial S corporations. California LLCs generally owe an $800 annual tax when the statutory conditions apply and may owe an additional fee based on California income, according to the 2025 LLC tax booklet (opens in a new tab).

New York adds its own election step. The 2025 Form CT-3-S instructions (opens in a new tab) state that a federal S corporation seeking New York S corporation treatment must file Form CT-6 and receive approval before filing Form CT-3-S or Form CT-34-SH. New York also charges LLCs an annual filing fee (opens in a new tab) based on New York-source gross income. These examples apply only to their own states, so check the revenue agency in each state where your business operates.

How does state formation differ from the federal election?

Formation and governance stay under state law. In Texas, the Texas Business Organizations Code (opens in a new tab) governs both. An LLC is formed by filing a certificate of formation and may be governed by a company agreement. A corporation is also formed by a certificate of formation and uses corporate governance documents, including bylaws.

The documents cover different ground. An LLC's company agreement generally addresses member rights, management, contributions, allocations, transfers and dissolution, and our guide to the Texas LLC operating agreement goes into it further. Corporate bylaws generally address the board, shareholder meetings, officers, records and corporate procedures. Annual meetings and other formalities depend on the entity statute, the certificate, the governing documents and the state. The formation steps themselves are in our guides on how to start an LLC and how to start an LLC in Texas.

How can the election end or change?

An S election can be revoked or can end on its own. Under section 1362, shareholders holding more than half of the shares can consent to revoke it. A revocation made on or before the 15th day of the third month of the tax year generally takes effect on the first day of that tax year; a later one generally takes effect on the first day of the next tax year, unless a later date is specified. The election also terminates if the corporation stops qualifying as a small business corporation.

Changing an LLC's classification has its own limit. The IRS page on possible repercussions for LLCs (opens in a new tab) states that, after an LLC elects to change its classification, it generally cannot elect another classification for 60 months after the effective date, subject to exceptions. The S election and the entity classification election are related but separate procedures. Closing the business under state law is another process, covered in our guide on how to dissolve an LLC.

Who handles each step?

Several offices and professionals share the work:

• Secretary of State: forms and records the state entity, including certificates of formation, registrations and certain amendments.
• IRS: federal classification and S elections, including Forms 2553, 8832 and 1120-S and related payroll and information returns. The IRS S corporation page (opens in a new tab) is a starting point.
• State revenue agency: franchise, income, payroll, information and entity-level taxes. In Texas, that is the Comptroller.
• Tax professional: classification choices, payroll, reasonable compensation, basis and tax returns.
• Attorney: entity formation, company agreements, bylaws, ownership rights, contracts, conversions and dissolution.

The SBA's guide to choosing a business structure (opens in a new tab) gives general background on each structure.

Frequently asked questions

These answers cover points that often come up after the main comparison.

Can a single-member LLC elect S corporation status?

Yes, if it meets the eligibility rules in the Form 2553 instructions. The owner must consent, and the LLC then files Form 1120-S each year instead of reporting on the owner's Schedule C.

What happens if Form 2553 is filed late?

The IRS may grant relief when the late filing was the only problem, there was reasonable cause and the business acted diligently and reported consistently. The relief period is generally within three years and 75 days of the intended effective date. Outside those conditions, a private letter ruling may generally be required.

Can another company own shares of an S corporation?

Generally no. Section 1361 limits shareholders to individuals, estates, certain exempt organizations and qualifying trusts, so a corporation or partnership as a shareholder can make the business ineligible.

Does New York automatically follow the federal S election?

No. New York's 2025 Form CT-3-S instructions require a federal S corporation to file Form CT-6 and receive approval before filing as a New York S corporation.

Next step

If you are deciding whether an LLC should keep its default classification or elect S corporation status, a tax professional and a business law attorney can review the details for your state. You can find business and tax law firms in the Counselado lawyer directory.