LLC and S corp election: how the two fit together
Updated 16 October 2026
Owners often ask whether to form an LLC or an S corp. The two answer different questions. A limited liability company, or LLC, is a legal structure formed under state law. An S corp is a tax election filed with the IRS. An LLC can make the election and stay an LLC under state law. So the usual question becomes whether a given LLC should elect S corp tax treatment, and when. This page explains how each works in the books. A CPA runs the tax figures for the election, and a business attorney advises on the legal structure. The examples on this page use round figures as an illustration.
The LLC: a legal structure
An LLC is formed with the state. It gives the owners liability protection and a flexible structure for ownership and management. For tax purposes, an LLC with one owner is taxed by default like a sole proprietor. An LLC with two or more owners is taxed by default like a partnership. Those defaults apply until the LLC files an election to be taxed another way.
For the books, an LLC under its default treatment records the owner's withdrawals as draws. Draws reduce the owner's equity account and do not appear as an expense on the income statement.
A design studio formed as a single-owner LLC earns $120,000 of profit in a year. The owner withdraws $8,000 a month, or $96,000, which the books record as owner draws. The remaining $24,000 stays in the business account. The income statement still shows $120,000 of profit, because draws sit in the equity section of the balance sheet. The figures are an illustration.
The S corp election: a tax choice
The S corp election changes how the business is taxed. Under the default LLC treatment, all of the owner's net profit is subject to self-employment tax. With the election, the owner who works in the business takes a reasonable salary through payroll, and that salary carries payroll tax. The remaining profit can be taken as distributions, which are not subject to self-employment tax. That split is the source of the savings the election can produce on a steady, sizable profit.
The salary has to be reasonable for the work the owner does. The IRS looks at owners who pay themselves a low salary to reduce payroll tax. A CPA sets the salary figure with the owner.
The same design studio elects S corp treatment. A CPA sets the owner's salary at $70,000, paid through payroll in 24 equal checks of $2,917 before withholding. The remaining $50,000 of profit is recorded as distributions. The books now carry payroll expense, payroll tax liabilities and a distributions account in place of owner draws. The figures are an illustration, and the salary level is a decision for the owner and the CPA.
What the election adds
- A payroll run for the owner's salary, with payroll filings through the year.
- A separate corporate tax return for the business each year.
- Tighter bookkeeping, with salary, payroll liabilities and distributions each in their own accounts.
- Higher fees for the payroll service and for tax preparation.
Those added costs are why the election makes sense above a certain level of profit and costs money below it.
A CPA estimates that the election would save $9,000 a year at the company's current profit. The owner gathers written quotes for three added costs: a payroll service, the corporate return and the monthly bookkeeping of payroll and distributions. The owner adds the three quotes for a year and subtracts the total from the $9,000. A positive result is the yearly gain from the election. The figures are an illustration, and the savings estimate comes from the CPA.
Where the line falls
The election starts to pay once profit is high enough, year after year, for the payroll tax savings to exceed the added costs of payroll, filings and tax preparation. Below that level, the default LLC treatment is simpler and costs less. The exact line depends on the owner's income, the state and the salary. It is a calculation for a CPA, made from a projection of profit.
A new company with uneven income, or an owner who prefers fewer filings, often stays with the default treatment. Many companies make the election a year or two after opening, once profit is steady. Choosing to wait is a normal outcome of the calculation.
In its first year, a CPA estimates savings of $3,000, which is less than the yearly total of the owner's quotes, so the owner keeps the default treatment. In the second year, profit has grown and the CPA's estimate is $11,000 of savings, which is more than the same quotes. The owner elects for the following year. The figures are an illustration.
Making the decision
The decision rests on the company's own figures. Project the profit for the coming year. Ask the CPA to model the payroll tax savings against the added costs at that profit. Confirm the timing of the election with the CPA before the filing date, and confirm any change to the legal structure with a business attorney. A well-timed election with a reasonable salary saves money each year. An election made too early, or with a salary set too low, adds cost and IRS risk.
Before the meeting with the CPA, an owner prepares three items: 12 months of actual profit from the books ($140,000), a projection for next year ($165,000) and the written quotes for the costs the election adds. The CPA uses the projection to model the election. Clean monthly books turn a 30-minute meeting into a decision. The figures are an illustration.
What this means for an owner
An LLC is a legal structure under state law, and S corp status is a tax election made with the IRS. An LLC can hold both. The election splits profit into a reasonable salary through payroll and distributions, and it adds payroll, a corporate return, tighter books and higher fees. The election pays when the savings exceed those costs year after year. A CPA runs that calculation, and a business attorney advises on the legal structure.
Books that support either structure
Averan Advisors keeps the books for LLCs under the default treatment and for LLCs that have elected S corp status. The bookkeeping service records owner draws, or salary, payroll liabilities and distributions, each in its own account.
The monthly close page explains what closing the books on a set date each month involves.
If you want this done for you
What happens next
Reading about it and having it done are different things. Here is exactly what happens if you want the second one.
- The call takes thirty minutesYou describe the business and where the numbers are letting you down. We give you an expert view of your situation, and what we would start with. There is no pitch deck.
- We look at the fileYou give us read access to the books as they are. We come back with what is wrong, what it will take to fix, and whether the answer is bookkeeping, controller work, or something else.
- We send a written scope and a priceIt lists what we do each month, what you get, the date it lands and the fee. We agree it before anything starts, and it does not change unless you agree.
- We take over the books and close the first monthWe set up access and systems and enter the opening balances. The first close lands on the date in the scope, and every one after it does too.