An LLC is neither an S corporation nor a C corporation. Those two labels describe how a business is taxed under the Internal Revenue Code, not what kind of legal entity it is. Your LLC is a state-law creation, and by default the IRS taxes it as a sole proprietorship (if you’re the only owner) or a partnership (if there are two or more owners). You can keep that default, or you can file paperwork asking the IRS to tax your LLC as a C corporation or an S corporation instead. The entity stays an LLC either way.
Why the Question Has No Single Answer
The IRS does not treat “LLC” as a tax category. It assigns your LLC one of four existing frameworks — sole proprietorship, partnership, C corporation, or S corporation — based on how many owners it has and whether the owners have filed an election.1Internal Revenue Service. Limited Liability Company (LLC)
“S corporation” and “C corporation” refer to subchapters of the Internal Revenue Code (Subchapter S and Subchapter C) that set out how business income reaches the government.2Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined A C corporation pays its own income tax. An S corporation passes income through to its owners, who report it on their personal returns. Choosing one is a federal tax decision. Your operating agreement, your state filing, and your liability shield stay the same.
How the IRS Taxes Your LLC by Default
If you form an LLC and file nothing else, one of two default classifications applies automatically.
Single-Member LLCs
A single-member LLC is a “disregarded entity” for income tax purposes, meaning the IRS treats the business activity as if you conducted it personally.3Internal Revenue Service. Single Member Limited Liability Companies You report income and expenses on Schedule C (or Schedule E or F, depending on the activity) attached to Form 1040. Net profit is subject to self-employment tax the same as a sole proprietor’s.
Multi-Member LLCs
An LLC with two or more members defaults to partnership taxation.4Internal Revenue Service. LLC Filing as a Corporation or Partnership The LLC files Form 1065, an informational return that reports totals but pays no tax at the entity level.5Internal Revenue Service. Tax Information for Partnerships Each member gets a Schedule K-1 for their share of profit and loss and reports it on their personal return. Each member’s share of net earnings is generally subject to self-employment tax.
The Self-Employment Tax Pressure Point
Self-employment tax is the main reason LLC owners look at changing classification. For 2026 the combined rate is 15.3 percent: 12.4 percent Social Security on net earnings up to $184,500, and 2.9 percent Medicare with no cap.6Social Security Administration. Contribution and Benefit Base Owners with net earnings above $200,000 ($250,000 married filing jointly) owe an additional 0.9 percent Medicare surtax. Under default taxation, this applies to essentially all of the LLC’s net profit.
Electing C Corporation Taxation
To have your LLC taxed as a separate entity that pays its own income tax, file IRS Form 8832 (Entity Classification Election).7Internal Revenue Service. About Form 8832, Entity Classification Election Once the election takes effect, the LLC is taxed under Subchapter C for federal purposes only.
Form 8832 asks for the LLC’s EIN, its exact legal name and address as registered with the state, and an effective date. The effective date cannot be more than 75 days before the filing date or more than 12 months after. Pick a date more than 75 days in the past and the IRS defaults the election to 75 days before you filed.
After the election, the LLC files Form 1120 and pays federal income tax at a flat 21 percent on its taxable income.8Internal Revenue Service. Instructions for Form 1120 The calendar-year deadline is April 15, with a six-month extension on Form 7004.9Internal Revenue Service. Publication 509 (2026), Tax Calendars Money paid out to owners as dividends is taxed again on the owners’ returns, generally at qualified dividend rates of 0, 15, or 20 percent depending on income, plus a possible 3.8 percent net investment income tax. That second layer is the classic drawback of C corporation status.
The tradeoff: the LLC can retain profits inside the business at 21 percent, which may sit below the owners’ personal brackets. Retained earnings can be reinvested without immediate personal tax. C corporation status also opens access to the Section 1202 exclusion for qualified small business stock, which can allow owners to exclude a significant portion of capital gain when they sell shares held at least five years.10Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
Electing S Corporation Taxation
S corporation status keeps pass-through treatment while potentially reducing self-employment taxes. You file Form 2553 (Election by a Small Business Corporation) rather than Form 8832.11Internal Revenue Service. About Form 2553, Election by a Small Business Corporation If your LLC hasn’t already elected corporate treatment, filing Form 2553 treats the LLC as a corporation and applies S status in one step. No separate Form 8832 is needed.12Internal Revenue Service. Instructions for Form 2553
Eligibility
Not every LLC qualifies. Under 26 U.S.C. § 1361, your LLC must meet all of the following:2Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined
- Organized in the United States.
- No more than 100 owners. Members of the same family can elect to be counted as one.
- Owners must be U.S. citizens or resident aliens who are individuals, or certain qualifying trusts and estates. Other corporations, partnerships, and nonresident aliens are not permitted owners.
- Only one class of ownership interest, meaning identical rights to distributions and liquidation proceeds. Voting differences alone do not create a second class.
Form 2553 requires each member’s name, address, taxpayer identification number, and ownership percentage. Every member must sign the consent. It’s unanimous, not majority.13Internal Revenue Service. Form 2553 – Election by a Small Business Corporation
The Reasonable Compensation Rule
The tax advantage of S status is that only the salary paid to an owner-employee is subject to Social Security and Medicare taxes. Additional profits distributed to the owner are not. But the IRS requires every shareholder who works in the business to receive “reasonable compensation” that reflects what the market would pay for the same work.14Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers A token salary paired with large distributions is not permitted.
There is no fixed formula. Courts have looked at the officer’s training and experience, time devoted to the business, duties performed, comparable pay elsewhere, and the company’s dividend history.15Internal Revenue Service. Wage Compensation for S Corporation Officers Set the salary too low and the IRS can reclassify distributions as wages, with back taxes, penalties, and interest.
Filing and Reporting
After the election, the LLC files Form 1120-S, which reports income and deductions but generally produces no entity-level tax.16Internal Revenue Service. Instructions for Form 1120-S Each member receives a Schedule K-1 and reports their share on their personal return. The calendar-year deadline for Form 1120-S is March 15, with an automatic six-month extension available through Form 7004.9Internal Revenue Service. Publication 509 (2026), Tax Calendars
Comparing the Three Treatments
Here is how the same $200,000 in net LLC profit might be treated under each classification, assuming a single owner in the 24 percent federal bracket:
- Default (disregarded entity or partnership share): income tax on the full $200,000, plus 15.3 percent self-employment tax on the same earnings, with the Social Security portion capping at $184,500 in 2026. Every dollar of net profit runs through both.6Social Security Administration. Contribution and Benefit Base
- S corporation: pay yourself a reasonable salary, say $90,000, on which you and the LLC owe payroll taxes. The remaining $110,000 flows through as a distribution subject to income tax but not payroll or self-employment tax. The savings sit on that $110,000.
- C corporation: the LLC pays 21 percent on taxable income. Anything distributed to you as a dividend is taxed again at qualified dividend rates. Retain earnings for growth and the immediate tax cost can be lower than the alternatives; distribute them and the second layer arrives.
A significant 2026 change narrows the pass-through advantage. The Section 199A qualified business income deduction, which allowed eligible pass-through owners to deduct up to 20 percent of qualified business income, expired for tax years beginning after December 31, 2025.17Internal Revenue Service. Qualified Business Income Deduction Unless Congress extends it, default, partnership, and S corporation owners no longer have access to that deduction.
Deadlines and Confirmation
Form 2553 must be filed no later than two months and 15 days after the beginning of the tax year the election should take effect, or any time during the preceding tax year.12Internal Revenue Service. Instructions for Form 2553 For a calendar-year LLC that means March 15 of the target year. Miss it and the election typically waits until the following year.
Form 8832 follows the 75-day/12-month window described above.7Internal Revenue Service. About Form 8832, Entity Classification Election Both forms go by mail or fax to the IRS service center for your area. Keep copies and proof of transmission.
After processing, the IRS sends written confirmation. S corporation elections generate Notice CP261.18Internal Revenue Service. Understanding Your CP261 Notice Form 8832 elections generate Notice CP277.19Internal Revenue Service. Understanding Your CP277 Notice Processing typically runs 60 to 90 days.
Late S Election Relief
If you missed the S corporation deadline, Revenue Procedure 2013-30 provides relief. File the late Form 2553 within three years and 75 days of the intended effective date, demonstrate reasonable cause for the delay, and show that you acted quickly once you found the mistake.20Internal Revenue Service. Revenue Procedure 2013-30 All shareholders must sign, and the LLC must have filed all federal returns consistent with S corporation status for each year since the intended effective date. Write “FILED PURSUANT TO REV. PROC. 2013-30” at the top of the form.
Undoing an S Corporation Election
An S election is not permanent. Owners holding more than half of the ownership interests can revoke it by filing a revocation statement with the IRS.21Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination File on or before the 15th day of the third month of the tax year (March 15 for calendar-year filers) and it takes effect on the first day of that year. File after that and it takes effect the first day of the following year, unless the statement names a later date.
S status can also terminate involuntarily. If your LLC has accumulated earnings and profits from a prior C corporation period, and more than 25 percent of gross receipts are passive investment income (rents, royalties, dividends, interest, annuities) for three consecutive tax years, the S election ends at the start of the following year. Even short of termination, the LLC owes a special tax on excess net passive income in any year it crosses the 25 percent threshold while holding those accumulated earnings and profits.22Office of the Law Revision Counsel. 26 USC 1375 – Tax Imposed When Passive Investment Income of Corporation Having Accumulated Earnings and Profits Exceeds 25 Percent of Gross Receipts Distributing the accumulated earnings and profits removes the trigger.
Revoking or losing S status does not dissolve the LLC. The entity reverts to its prior classification, usually C corporation, unless you file a new Form 8832 to select something else. After a revocation or termination, the LLC generally cannot re-elect S status for five tax years without IRS consent.