S-corp vs LLC: pros, cons and real costs

3. Formation and ongoing costs

Forming. Most owners who want S-corp taxation form an LLC, so the state cost is the same as any LLC. Filing Form 2553 itself has no IRS fee (a user fee applies only if you ask the IRS to approve certain non-calendar tax years; see the Form 2553 instructions). The state fees below come from our database, checked against each state's official fee page:

Running an S-corp each year adds costs a default LLC doesn't have:

• Payroll service: about $660 a year at one popular provider's list price for one person (Gusto pricing). Our typical range is $500–$1,500, depending on provider and service level. This is a typical range, not a quote.
• Form 1120-S preparation: about $903, the average fee in the National Society of Accountants' 2020–21 survey (NSA survey). It's dated, and current fees are likely higher.
• Unemployment tax on your salary: federal unemployment tax on the first $7,000 of wages plus your state's rate; $285 in the Texas example.
• State entity taxes in a few places (next section).

That's roughly $1,563 a year before any saving, which is why the election rarely pays at low profit.

4. Paperwork and compliance

Default LLC: a one-owner LLC reports profit on Schedule C of the owner's return; a multi-owner LLC files Form 1065 and gives each member a K-1. Plus your state's annual report or tax.

S-corp: everything above, plus:

• Form 1120-S each year, with a Schedule K-1 for every shareholder. For a calendar-year company it's due by the 15th day of the 3rd month after year-end, normally March 15 (Form 1120-S instructions).
• Payroll filings: Form 941 every quarter, Form 940 each year, W-2s for you and any staff, plus state withholding and unemployment returns (IRS filing chart).
• Health insurance the company pays for an owner with more than 2% goes on the owner's W-2 as wages, though it isn't subject to Social Security and Medicare tax if paid under a plan that meets the IRS rules (IRS).
• Timing: Form 2553 must be filed within 2 months and 15 days of the start of the tax year it should apply to, or any time in the year before (Form 2553 instructions).

State differences. Not every state treats an S-corp like the IRS does. Examples we've checked:

• California: S-corps pay 1.5% of net income, with an $800 minimum (FTB). LLCs pay an $800 annual tax too (FTB), so the extra cost is the 1.5% above $800.
• New York City: the city doesn't recognize the S election, so an S-corp pays the General Corporation Tax (NYC Finance), while an unincorporated business such as an LLC pays the Unincorporated Business Tax instead (NYC Finance).
• Illinois: S-corps (and partnerships) pay a 1.5% personal property replacement tax on net income (Illinois Department of Revenue); a one-owner LLC taxed as a sole proprietorship doesn't.
• Tennessee: the franchise and excise tax applies to LLCs and S-corps alike, so the election changes little at state level (Tennessee Department of Revenue).

Some states also have their own election or filing rules for S-corps. Check with your state's revenue department before you elect.

5. Ownership restrictions

An LLC can have any number of owners of any type. To elect and keep S-corp status, the business must (Form 2553 instructions, IRS):

• be a domestic corporation or an eligible domestic entity such as an LLC;
• have no more than 100 shareholders (spouses, and members of a family, can count as one);
• have only eligible shareholders: individuals, estates, certain trusts and certain exempt organizations, and no nonresident aliens, partnerships or corporations;
• have one class of stock: all shares carry identical rights to distributions and liquidation proceeds (different voting rights are allowed).

Break a rule, for example by selling a share to a foreign investor or another company, and the election can end. Once it ends, you generally need IRS consent to elect again for about five years (Form 2553 instructions).

6. Flexibility for raising capital

Profit splits. A multi-owner LLC can allocate profit and loss in its operating agreement in ways that don't match ownership, as long as the allocations meet the IRS rules (Form 1065 instructions). That helps when one partner brings money and another brings work. An S-corp can't: with one class of stock, profit goes to shareholders strictly by shares owned.

Outside investors. Many investment funds are organized as partnerships or LLCs, and investors often want preferred stock. An S-corp can't have partnership or corporate shareholders or a second class of stock, so taking that kind of money usually ends the election. That's a big part of why venture-backed startups are almost always C-corps. An LLC can take investors more easily than an S-corp, though many venture investors still prefer a C-corp. Compare all three in our LLC vs S-corp vs C-corp guide.

7. When each makes sense

These are rules of thumb from our 2026 model, not advice. Salary at 60% of profit (at least $40,000), typical payroll and prep costs, single filer:

Stay a default LLC if profit is under roughly $60,000 a year, it's uneven or just starting, you don't want to run payroll, you have (or may take) foreign, corporate or fund investors, or you need flexible profit splits between partners.

Consider the S-corp election if profit is steady and well above that level, most of it would remain after a reasonable salary, you're willing to run payroll and file a separate return, and every owner is an eligible shareholder. Check your state first: in places like California, Illinois and New York City the saving is smaller.

Look at a C-corp instead if you plan to raise venture capital or issue different classes of stock.

Not sure? Take the which-structure quiz, or ask a free Small Business Development Center adviser.