An LLC and an S corporation are two different concepts that often get confused. An LLC (limited liability company) is a legal business structure created under state law. It provides limited liability protection to its owners (called members) while allowing flexible management and fewer formalities than a corporation. An S corporation, by contrast, is not a business structure at all but a tax classification available under the Internal Revenue Code. Both LLCs and corporations can elect to be taxed as S corporations if they meet the IRS eligibility rules.
The main distinction is therefore legal versus tax-related: an LLC defines how a business is formed and governed, while S corporation status determines how the business’s profits and losses are reported and taxed. LLCs offer broad flexibility in ownership, allocation of profits, and management, while S corporations impose limits—such as one class of ownership and no more than 100 shareholders—but may reduce self-employment taxes if properly structured.
In short, forming an LLC governs your legal and operational structure, while electing S corporation tax status governs how the IRS treats your business income. Many small businesses operate as LLCs for simplicity and then later elect S corporation tax status to achieve potential tax advantages.