S Corporation vs. LLC

Both an S Corporation and an LLC protect their owners from personal liability for business debts, and both can be structured to avoid paying tax at the entity level, but they work differently in practice. An LLC is more flexible in its ownership structure and requires far less paperwork and formality than a corporation, which must maintain a board of directors, hold regular meetings, and keep corporate minutes. When it comes to self-employment taxes, LLC members who are active in the business generally owe those taxes on their entire share of profits, while S Corporation shareholders only owe payroll taxes on their W-2 salary. Many business owners choose to form an LLC and then make an S Corporation tax election to get the administrative simplicity of an LLC combined with the payroll tax savings available to S Corporation shareholders. The right choice depends on the level of profit, how involved the owners are in daily operations, and whether the added administrative cost of S Corporation compliance is worth the potential tax savings.