LLC vs S-corp: the cost comparison
An S-corporation is not a state entity type — it is a federal tax election. You form an LLC (or a corporation) with the state, then elect S status with the IRS on Form 2553. That means the S-corp’s cost stack sits on top of the underlying state filing, and the comparison is really “LLC taxed as itself” versus “LLC (or corporation) taxed as an S-corp.”
| Cost item | LLC (default tax) | LLC electing S-corp status |
|---|---|---|
| State formation filing | $35–$500 (Articles of Organization) | Identical — the same Articles of Organization; the election itself is filed with the IRS for free |
| Form 2553 election | — | $0 (IRS form, no filing fee) |
| Annual state charges | State report fee + any LLC franchise/minimum tax | The same state LLC charges continue (the state still sees an LLC) — CA’s $800 minimum applies either way |
| Federal return | Schedule C (single-member) or Form 1065 (multi-member) | Form 1120-S, a separate corporate return, plus K-1s — commonly prepared professionally |
| Payroll | Not required for owners | Required: the owner-employee must be paid a reasonable salary through payroll, with payroll tax filings (and usually a payroll service fee) |
| Self-employment tax | 15.3% on all net earnings | Only on the salary portion; remaining profit passes through as distributions not subject to SE tax — the source of the classic S-corp saving |
| State-level extras | — | Some states add their own layer (e.g. California charges S-corps a 1.5% tax with the same $800 minimum) |
Where the S-corp math usually turns
The trade is mechanical: you pay for payroll processing, an extra return, and stricter bookkeeping, and in exchange the profit above your reasonable salary escapes the 15.3% self-employment tax. The costs are roughly fixed; the saving scales with profit. At modest profits the added accounting and payroll costs commonly eat the entire saving; at higher profits the saving grows while the costs stay flat — which is why the election is typically revisited as income rises rather than chosen on day one. The IRS requires the salary to be reasonable for the work, and setting it too low is a well-known audit trigger. Model your own numbers with a CPA before electing: the break-even depends on your state fees, your payroll-service cost, and your profit level, and none of those are universal.
Start with the state fees both structures share
Whichever tax treatment you choose, the state filing is the same. See your state’s LLC charges in the calculator: Open the LLC cost calculator →
Deadlines and traps
- Form 2553 timing: for an existing entity, the election is generally due by March 15 to apply for that tax year (or within 75 days of formation for a new entity). Late-election relief exists but is not guaranteed.
- Eligibility is narrow: S-corps allow only US-resident individuals (and certain trusts/estates) as shareholders, one class of stock, and at most 100 shareholders — an LLC’s flexibility is given up in exchange for the tax treatment.
- State conformity varies: a few states tax S-corps differently or require a separate state election; confirm your state’s treatment before filing.
Educational information only. LLC Cost Guide is not a law firm, accounting firm, or filing service, and nothing on this page is legal or tax advice. Fees and deadlines change; confirm the current figures with your Secretary of State (or Division of Corporations) before filing, and consult a licensed attorney or CPA for advice about your specific situation.