Knowledge Center | Business formation
"LLC or S corp?" is the wrong question.
An LLC is a legal structure. An S corp is a tax election. They aren't alternatives, and once you see why, most of the arguments online stop making sense.
Two columns: structure chosen with the state, tax treatment chosen with the IRS, with lines showing which combinations exist.
1200 x 750What this is about
Two decisions, two agencies, one widespread confusion
You make one decision with your state: what legal structure the business takes. You make a second with the IRS: how that structure is taxed. They're separate, they happen at different times, and one does not determine the other.
Nearly every argument you'll read about business structure collapses these two together. That's why the advice feels contradictory. People are comparing a legal form to a tax election as if you had to pick one. It's a bit like arguing over whether to buy a car or finance one.
A single-member LLC can be taxed as a disregarded entity, as a C corporation, or as an S corporation. In all three cases it is the same LLC, with the same state filing, the same operating agreement, and the same liability structure. What changed is a form sent to the IRS.
Decision two
The four federal tax classifications
Every business falls into one of these for federal income tax. Some are defaults you get automatically; others you elect.
| Classification | Who gets it | How the tax works |
|---|---|---|
| Disregarded entity | Default for a single-member LLC. | The IRS largely ignores the entity and treats the activity as the owner's. Income typically flows onto the owner's own return. The LLC still exists legally; it just isn't taxed as a separate thing. |
| Partnership | Default for a multi-member LLC, and for general and limited partnerships. | The entity files an informational return. Income and losses pass through to the members, who report their shares. The entity itself pays no federal income tax. |
| C corporation | Default for a corporation. Can be elected by an LLC. | The corporation pays its own federal income tax on profit. Money distributed to shareholders can be taxed again at their level. That's what people mean by double taxation. |
| S corporation | An election available to eligible corporations and LLCs. | Income and losses generally pass through to qualifying shareholders. Comes with eligibility limits, reasonable-compensation requirements, and payroll obligations that didn't exist before. |
Default means it happens without you doing anything. Election means you file a form. Source: IRS, Limited Liability Company.
Twenty years of returns is behind this section
Ian prepared tax returns professionally for over twenty years, most recently for the 2025 filing year. NCC doesn't prepare returns any more, so this is background rather than a sales pitch - but it's why this page gets into the mechanics instead of waving at a CPA and changing the subject.
A detail that matters
Single-member and multi-member LLCs are the same entity type
Your state doesn't offer two kinds of LLC. There's one, and the number of members determines the default federal tax treatment rather than the legal form.
So adding a partner to a single-member LLC doesn't change what the entity is. It changes how the IRS treats it by default, from disregarded to partnership, and that brings a return the business didn't previously have to file. People discover this the following spring.
Single-member LLC
- Default: disregarded entity.
- Activity generally reported on the owner's return.
- No separate federal income tax return for the LLC by default.
- Can elect to be taxed as a corporation instead.
Multi-member LLC
- Default: partnership.
- Files an informational return; members receive their shares.
- That filing obligation is new, and has deadlines and penalties attached.
- Can also elect corporate treatment.
The one everyone asks about
What the S corp election actually does
This is the question that drives most of the content in this space, and it's usually answered badly in both directions.
Without the election, a profitable owner-operated business generally has its profit subject to self-employment tax. With an S election, the owner pays themselves a salary through payroll and takes the rest as a distribution. The salary carries employment taxes. The distribution, generally, does not.
That's the entire mechanism. Everything else written about S corps is commentary on it.
The catch is that it isn't free. The election brings a separate corporate return, payroll processing and filings, and the requirement that the salary be reasonable for the work performed. Setting it artificially low to shrink the employment tax bill is a position you have to be able to defend, and it's a well-known area of scrutiny.
So there's a crossover point. Below a certain profit level, the added cost and administration exceed the saving, and the election makes you poorer. Above it, the maths turns. Where that point falls depends on your profit, your industry, what a reasonable salary looks like for your role, and what the compliance will cost you.
You'll see confident thresholds quoted everywhere. They're guesses dressed as rules, and they ignore the variables that actually decide it. The useful thing is knowing the mechanism and knowing the question exists, so you can ask it with your own figures in front of you at the point it becomes live.
Common mistakes
Where this goes wrong
"I'll form an S corp."
You can't. You form an LLC or a corporation with your state, then elect S treatment with the IRS. The phrase is common shorthand, and believing it literally leads people to ask their state for something it doesn't offer.
"An S corp will save me money."
It can, above a certain profit level. Below it, the added returns, payroll, and administration cost more than the employment tax saved. The election has made plenty of small businesses worse off.
"I'll pay myself a tiny salary and take the rest as distributions."
Compensation has to be reasonable for the work being done. This is a known area of examination, and an aggressive position can be adjusted with tax and penalties attached.
"Adding my spouse to the LLC doesn't change anything."
It generally changes the default federal classification from disregarded to partnership, which brings a filing obligation the business didn't have before. Worth knowing in advance rather than in April.
"A C corp always means double taxation, so never pick it."
The second layer applies to distributed profit. Businesses that retain earnings, plan to raise outside investment, or have particular benefit structures sometimes have good reasons for it. "Never" is as unhelpful as "always."
What you can do yourself
Work out where you actually stand
- Find out what your current classification is. Many owners don't know, and it's usually the default for their structure and member count.
- Work out your actual net profit for the last full year, after real expenses. Not revenue.
- Find out what someone doing your job would be paid as an employee. That's the reasonable-salary anchor.
- Get a quote for payroll processing and a corporate return in your area. That's the cost side.
- Now you have the three numbers the question turns on, and the conversation becomes short.
If your profit is modest, you have your answer and you didn't need to pay anyone for it.
Related
Keep reading
Where NCC fits: Ian prepared tax returns professionally for more than twenty years, most recently for the 2025 filing year. NCC no longer prepares returns, so this is background rather than a service, but it means a conversation about classification gets a real answer. Formation support ->
Sources
Check our work
General education, reviewed 27 October 2026. Not tax or legal advice. NCC does not provide legal advice of any kind and does not prepare or file tax returns. Tax rules change; verify against current IRS guidance or a qualified professional before acting.
Got the three numbers and want a second opinion?
That's a short conversation and often ends with "not yet, come back when profit is higher." Which is a perfectly good outcome and costs you nothing to find out.