How S Corps and LLCs Pay Taxes

Which business type is right for you?

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Many small businesses are structured as limited liability companies (LLCs) or S corporations. If you are just starting into business and looking at business types, you may find the difference between an LLC and an S corporation confusing. The two business types are similar, but they do have some essential differences. We will look at the structure of the two business types, how the businesses report tax liability, and how the owners of these businesses pay taxes.

Key Takeaways

  • LLC and S corporation business structures differ, in that owners of single-member LLCs are like sole proprietors and S-corp owners are shareholders.
  • Single-member LLC owners include their business income and losses on their personal tax returns, whereas S corps file via Form 1120-S.
  • Single-member LLCs pay self-employment taxes on their income, whereas S-corp income isn't subject to self-employment tax.
  • Both LLC's and S corps may be eligible for the qualified business income deduction.

LLC and S-Corp Structures for Tax Purposes

LLC's (classified for tax purposes as a sole proprietorship or a partnership) and S corporations are considered pass-through business entities. This means the taxes of the business are reported on the business tax return but are passed through to the individual owners. The owners receive a tax form that's included with the owner's tax return.


A limited liability company registers with a state but the LLC isn't recognized by the IRS as a tax entity. LLC owners are called "members." The IRS treats LLCs either as corporations, partnerships, or as part of the LLC owner's tax return (a "disregarded entity"). How an LLC pays federal income tax depends on how many owners it has:

  • An LLC with one owner (called a single-member LLC) is considered a separate (disregarded) entity, and it pays taxes in the same way as a sole proprietor.
  • An LLC with multiple members is considered by default to be taxed as a partnership.

S Corporation

An S corporation (sometimes called a "Subchapter S corporation") is a special kind of corporation. Instead of the corporation paying federal income taxes, these taxes are passed through to the personal tax returns of the owners (shareholders).

Starting an LLC vs. Starting an S Corporation

An LLC is formed when it registers with a state by filing articles of incorporation with the state in which the owner or owners want to do business.

An S corporation becomes one when the business elect S corporation status by filing Form 2553 with the IRS.

An LLC may elect to be taxed as a corporation or as an S corporation. To do this, the business must file an election on Form 8832 by a specific date. Check with your tax professional to discuss the pros and cons of this election.

Reporting Federal Income Taxes

Single-member LLC members pay income taxes on the net income of their business, through their personal tax return.

Multiple-member LLCs report total partnership taxes on IRS Form 1065. This form is an information return. Generally, the partnership doesn't pay tax on its income; the income is passed through to the individual partner (LLC member) tax returns.

S corporations report federal income taxes on IRS Form 1120-S. Shareholders pay their taxes based on their share of the S corporation's taxable income.

Information from the Schedule K-1 for each multiple-member LLC member and S corporation shareholder is included in Schedule E of the owner's tax return.

Self-Employment Taxes

Owners of single-member LLCs are considered to be self-employed, and they must pay self-employment tax (Social Security and Medicare tax) on their share of the profits of the business.

S-corporation shareholder income isn't self-employment income and it isn't subject to self-employment tax.


Total income for LLC members in a partnership may include different kinds of income (dividends, for example) that are not considered self-employment income. Schedule K-1 for these owners has a separate category for self-employment earnings (loss).

Qualified Business Income Deduction

LLC members and S corporation shareholders may be eligible for a qualified business income deduction. This deduction allows a deduction of up to 20% of their qualified business income, in addition to standard business deductions.

Limitations on Business Losses

Business owners who don't materially participate in their businesses may not be able to claim all losses on their tax returns. Owners of LLCs and S corporations are both subject to passive-loss limitation rules.

Frequently Asked Questions (FAQs)

Which is better: S corp or LLC?

It depends on what you want out of your business. Single-member LLC's have relatively simple tax situations similar to those of a sole proprietorship, which gives them an advantage over S corps. LLCs are allowed unlimited members and can have non-U.S. citizens, whereas S corps are limited to 100 owners and cannot have non-U.S. citizens as shareholders.

Why would someone use an LLC instead of an S corporation?

There are several reasons. First, you are a single-member business and want liability protection without the hassle of corporation paperwork, an LLC is a good fit. Second, setting up an LLC is an easier process than setting up a corporation.

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  2. IRS. "S Corporations."

  3. IRS. "Limited Liability Company (LLC)."

  4. IRS. "Single Member Limited Liability Companies."

  5. TurboTax. "Can I Convert My LLC to an S-Corp When Filing My Tax Return?"

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  8. Schedule E. "Supplemental Income and Loss," Page 2.

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  14. Wolters Kluwer. "Compare S Corporation vs. LLC—Differences and Benefits."

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