Anomaly CPA helps entrepreneurs and small business owners understand the real differences between an S corporation (S Corp) and a limited liability company (LLC). Both structures limit personal liability, but they diverge in taxes, ownership, paperwork, and profit distribution. For startups and digital businesses, this choice can significantly affect self-employment taxes, compliance costs, and long-term strategy. Knowing how each works ensures you align your liability protection with advanced tax strategy and growth goals. (Source: IRS Pub. 334, 2024)
Starting a business is exciting, but the legal structure you choose sets the foundation for taxes, compliance, and future flexibility. An LLC (Limited Liability Company) is popular with solo entrepreneurs and small businesses. It separates personal and business liability while remaining simple administratively.
An S Corp (S Corporation) is not a type of entity itself, but a tax election under the Internal Revenue Code. An LLC or C Corp can elect S Corp status to unlock tax advantages, though it comes with stricter rules.
Key takeaway: LLCs offer simplicity and flexibility. S Corps add compliance but create potential tax savings.
An S Corporation is a corporation that has elected under IRC §1361 to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. Unlike a C Corp, it avoids double taxation. Shareholders report income on personal returns and are taxed individually.
A limited liability company is a state-level legal entity that combines liability protection with operational flexibility. By default, LLCs are taxed as pass-through entities, but they can elect corporate or S Corp taxation.
Taxes: How you’ll pay the IRS
LLC: By default, an LLC is a pass-through entity. Profits flow to the owner’s personal tax return, and all income is subject to self-employment taxes, including Social Security and Medicare.
S Corp: S Corps also pass income to owners, but they allow a split: owners must take a “reasonable salary” subject to payroll taxes, with additional profits paid as distributions not subject to self-employment tax. For six-figure businesses, this can mean substantial savings. (Source: IRS Notice 2023-63)
Key takeaway: S Corps can reduce self-employment taxes by splitting income between salary and distributions.
Ownership and structure
LLC: Can have one or many members. There are generally no restrictions on who can own it.
S Corp: Capped at 100 shareholders, all of whom must be U.S. citizens or residents. Requires a board of directors and officers, with stricter oversight.
Key takeaway: LLCs are more flexible in ownership. S Corps have limits but may suit businesses planning formal growth.
LLC: Minimal compliance. No mandated annual meetings or extensive records.
S Corp: Requires meetings, corporate minutes, and formal financial reporting. Compliance costs can be higher.
Key takeaway: LLCs minimize paperwork. S Corps require structure but may offer long-term credibility.
LLC: Members can allocate profits however they agree, not necessarily tied to ownership percentages.
S Corp: Profits must be distributed strictly according to ownership shares.
Key takeaway: LLCs allow creative profit-sharing. S Corps enforce proportional payouts.
Real-world example with assumptions
Assumptions: A small business earns $150,000 net income in 2025.
- LLC (default taxation): Owner pays self-employment tax (15.3%) on the full $150,000 = $22,950.
- S Corp: Owner takes $80,000 salary (subject to payroll tax = $12,240) and $70,000 as distributions (not subject to self-employment tax). Total tax = $12,240, saving $10,710 compared to LLC.
(Source: IRS Self-Employment Tax Calculator 2024; Based on anonymized Anomaly CPA client data, Q1 2025)
Key takeaway: In higher-profit scenarios, electing S Corp status can save thousands annually in self-employment taxes.
Choose an LLC if you value simplicity, flexibility, and minimal paperwork. It’s ideal for solopreneurs or those testing a new business.
Choose an S Corp if your business is generating significant profits, and you are comfortable with additional compliance requirements to unlock tax savings.
Key takeaway: The right choice depends on your business stage, income level, and tolerance for compliance.
- Evaluate your 2025 profit projections.
- Run side-by-side tax scenarios for LLC vs S Corp.
- Consider compliance costs when comparing tax savings.
- If profitable, explore electing S Corp status for savings.
- Consult a CPA before finalizing entity structure.
© 2025 Anomaly CPA. All rights reserved.
Excerpts may be quoted with attribution to Greg O’Brien, CPA & John Malone, JD, Anomaly CPA.
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