Quick answer: An LLC is how your business is set up legally. An S corp is how it can be taxed. Most owners should keep the LLC and consider electing S corp taxation once steady profit is above roughly $50,000 to $60,000 a year, when payroll tax savings start to outweigh the added costs.
“Should I be an S corp?” is one of the most common questions we hear from business owners in Ashburn and across Northern Virginia. If the term itself is new to you, read What Is an S Corp? first.
An LLC is a structure. An S corp is a tax choice.
An LLC is a legal entity you form with the Virginia State Corporation Commission. It protects your personal assets and keeps business and personal finances separate.
An S corporation is not a separate type of company. It is a tax election you make with the IRS using Form 2553. An LLC can stay an LLC legally while being taxed as an S corp.
| LLC (default) | LLC taxed as S corp | |
|---|---|---|
| Legal entity | LLC | Still an LLC |
| Liability protection | Yes | Yes |
| How owners get paid | Owner’s draw | Salary plus distributions |
| Self employment or payroll tax | On nearly all profit | Only on salary |
| Payroll required | No | Yes |
| Business tax return | None for one owner, Form 1065 for two or more | Form 1120-S plus Virginia Form 502 |
How an LLC is taxed by default
- Single member LLC: profit goes on Schedule C of your personal return
- Multi member LLC: the business files a partnership return (Form 1065) and each owner gets a K-1
Either way, nearly all of the profit is subject to self employment tax of 15.3% on top of income tax. Money you take out is an owner’s draw, which does not change how much tax you owe.
How the S corp election can save money
As an S corporation, owners who work in the business must take a reasonable salary through payroll. Payroll taxes apply to that salary. Profit above the salary can be paid as distributions, which are not subject to Social Security and Medicare tax.
| LLC (default) | LLC taxed as S corp | |
|---|---|---|
| Net profit | $120,000 | $120,000 |
| Owner salary | None | $70,000 |
| Profit subject to Social Security and Medicare | About $110,800 | $70,000 |
| Approximate payroll or self employment tax | About $17,000 | About $10,700 |
In this simplified example, the S corp saves roughly $6,000 a year in payroll taxes before the added costs below. Your real numbers depend on your salary, deductions and other income.
Savings at different profit levels
The pattern is consistent: the higher and steadier your profit, the more the S corp election is worth. Try our self employment tax calculator to see what you pay today.
Single member LLC vs S corp
Most of our one owner clients start as a single member LLC. It is simple: no payroll, no separate return, and profit goes straight onto Schedule C.
Electing S corp status changes three things for a one person business:
- You become an employee of your own company and get a W-2
- The business files Form 1120-S and Virginia Form 502 each year
- You pay yourself on a schedule instead of drawing money whenever you need it
Sole proprietor?: Sole proprietors cannot elect S corp status. You need an LLC or corporation first, which also gives you liability protection.
The added costs to weigh
- Running payroll, including quarterly payroll filings and Virginia unemployment tax
- A separate business tax return (Form 1120-S federally and Form 502 for Virginia)
- More detailed bookkeeping so salary, distributions and owner expenses are recorded correctly
- The rules on reasonable salary, which the IRS does review
Virginia charges the same $50 annual registration fee for an LLC whether or not it elects S corp status, so that cost does not change.
When it usually makes sense
There is no single cutoff. Many owners start running the numbers once profit is steady above roughly $50,000 to $60,000 a year and they can pay themselves a fair salary without straining cash flow. Below that, the added costs often cancel out the savings.
Reasonable salary: Your salary should be close to what you would pay someone else to do your job. Setting it too low to save tax is one of the most common reasons S corps get questioned.
Planning to raise investor money instead? Read C corp vs S corp.
How to convert an LLC to an S corp
- Run a projection with your expected profit and a reasonable salary
- File Form 2553 by the deadline (March 15 for most existing calendar year businesses)
- Set up S corp payroll and register for Virginia withholding and unemployment tax
- Update your books so owner pay and distributions are tracked separately
You do not need to form a new company or file anything new with the Virginia SCC.
→Related guideForm 2553 Explained: deadlines, instructions and late reliefEverything you need to file the election correctly the first time.LLC vs S corp FAQs
Is an S corp better than an LLC?
Neither is better on its own because they are not the same kind of thing. An LLC is a legal entity and an S corp is a tax status. The real question is whether your LLC should be taxed as an S corp, which usually depends on profit.
Can an LLC be an S corp?
Yes. An LLC can elect S corp taxation by filing Form 2553. It stays an LLC under Virginia law, keeps its name and liability protection, and is simply taxed differently.
How do I convert my LLC to an S corp?
You do not form a new company. File Form 2553 with the IRS, set up payroll for the owners and update your books. Nothing changes with the Virginia SCC.
Single member LLC or S corp: which is better for one owner?
A single member LLC taxed the default way is simpler and cheaper to run. Electing S corp status usually pays off once steady profit is above roughly $50,000 to $60,000 a year.
What is the difference between an owner’s draw and an S corp distribution?
An owner’s draw is how a default LLC owner takes money out; all profit is still subject to self employment tax. An S corp distribution is profit paid above a reasonable salary and is not subject to Social Security and Medicare tax.
Can I switch back from an S corp to an LLC?
You can revoke the S election and return to default LLC taxation, but you generally cannot elect S status again for five years.
Sole proprietor vs LLC: do I need an LLC first?
To elect S corp status you need an LLC or corporation. A sole proprietor has no entity to elect with, and also has no liability protection.
Get a clear answer for your business
We run this comparison for business owners all the time. Our S corp election and tax planning services include a side by side projection so you can decide with real numbers, not guesses.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
