Default LLC and S corp election, posted side by side
S corp election or default LLC, side by side
An LLC is taxed one way unless it asks for another. This guide sets the default treatment against an S corporation election: taxes, payroll, owner salary, paperwork and when the election starts to make sense, written in plain words with neither side presented as the winner.
The same business, posted both ways
Each entry is one difference, read across the stem.
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AHow the IRS classifies it
Default LLCA single-owner LLC is disregarded and taxed like a sole proprietorship. An LLC with two or more owners is taxed as a partnership.
S corp electionThe LLC stays an LLC under state law, but files an election with the IRS asking to be taxed as an S corporation instead.
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BHow the owner is paid
Default LLCOwners take draws from the profit when they choose. There is no payroll for the owners themselves.
S corp electionAn owner who works in the business is paid a reasonable salary through payroll, and can take further profit as distributions.
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CSelf-employment tax
Default LLCSelf-employment tax generally applies to the owner’s whole share of the net earnings.
S corp electionPayroll taxes apply to the salary. Distributions above the salary are generally not subject to self-employment tax.
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DThe federal return
Default LLCA single owner reports the business on their personal return. A multi-owner LLC files a partnership return and gives each owner a statement of their share.
S corp electionThe business files its own S corporation return and gives each owner a statement of their share, which flows to their personal return.
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EPaperwork through the year
Default LLCFewer moving parts: the state’s own filings, the income tax return and estimated tax payments.
S corp electionRunning payroll, filing payroll returns, keeping salary and distributions apart, and records showing the salary is reasonable.
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FWho can own it
Default LLCFew limits on who the owners are or how many there are.
S corp electionEligibility rules apply: a cap on the number of shareholders, limits on what kind of owner qualifies, and only one class of stock.
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GThe state’s view
Default LLCMost states follow the federal treatment of an LLC, with their own annual filings and taxes on top.
S corp electionStates do not all treat the election the same way. Some tax S corporations at the entity level or handle them differently from the federal rules.
Neither side balances better on its own. Which one fits depends on the profit, the owner’s pay and the paperwork the business is ready to carry.
The election, in order
How an LLC elects to be taxed as an S corp
The election is a tax choice layered on top of the LLC. These are the steps an owner moves through, in the order they usually happen.
- 01
Form the LLC
The business is set up under state law first. The S corp election changes how it is taxed, not what kind of entity it is.
- 02
Check eligibility
The owners, the number of them and the ownership structure all have to meet the S corporation rules before the election can be made.
- 03
File the election
The election goes to the IRS with every owner’s consent, by a deadline tied to the start of the tax year it should first apply to.
- 04
Set up payroll
Each owner who works in the business goes on payroll, and the salary has to be one that could be defended as reasonable for the work.
- 05
File each year
The S corporation return replaces the earlier federal return, and the state’s own treatment of the election has to be kept in step.
How this guide is organised
Four accounts the comparison runs through
Every question about the two sides lands in one of these. Each is worked through for a default LLC and for an S corp election in turn.
- 01
Taxes
How each side is taxed
Income tax, self-employment tax and payroll tax, and where each one falls on a default LLC and on an S corp election.
- 02
Payroll
Owner salary
What a reasonable salary means, how it is set and why it matters to whether the election works as intended.
- 03
Paperwork
Filings and records
The returns, payroll filings and records each side asks of an owner through the year.
- 04
Timing
When the election makes sense
The questions to settle with an accountant before electing, and what changes if the business outgrows its first choice.
How it is written
What you will and will not find here
On every page
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Both sides, given equal room
A difference is written for the default LLC and for the S corp election alike.
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Figures carry their source
A tax rule or threshold is attributed to the agency that publishes it.
On no page
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No verdict for every business
Whether to elect depends on circumstances an article cannot see.
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No scores or star ratings
Where one option suits a situation better, it is said in words, with the reason.
Open questions
Questions each side raises
The questions owners ask when weighing the election, set out on the side of the account they belong to.
Staying a default LLC
- Is a single-owner LLC taxed any differently from a sole proprietorship?
- Which earnings does self-employment tax reach on a default LLC?
- Does staying a default LLC ever become the more expensive choice?
Making the S corp election
- What counts as a reasonable salary for an owner on payroll?
- What extra filings and costs come with the election?
- Can the election be undone if it stops suiting the business?