Selecting the right legal structure for your business is a crucial decision that impacts taxation, liability, and management flexibility. Two of the most popular options are the Limited Liability Company (LLC) and the S Corporation (S Corp). While both offer liability protection, they differ in key areas, including taxation, ownership, and management requirements.
In this blog, we’ll explore 12 factors to consider when choosing between an LLC and an S Corp in 2025, with a particular focus on Texas, where many entrepreneurs opt to incorporate their businesses.
1. Taxation Structure
- LLC: An LLC is a pass-through entity for tax purposes, meaning profits and losses are reported on the owner’s personal tax return. LLCs can be taxed as a sole proprietorship, partnership, or even elect to be taxed as an S Corp or C Corp.
- S Corp: S Corps are also pass-through entities, but owners can treat themselves as employees. This allows S Corp owners to pay self-employment taxes only on their salary, not on the entire business income, which can reduce the overall tax burden.
2. Liability Protection
Both LLCs and S Corps offer limited liability protection, shielding owners’ personal assets from business debts and lawsuits. This means that owners aren’t personally responsible for the business’s liabilities, making it a critical consideration for entrepreneurs looking to minimize personal financial risk.
3. Ownership Structure
- LLC: LLCs offer greater flexibility. They can have one or multiple members, and there are few restrictions on who can be an owner. LLCs can also have non-U.S. citizens as members, which makes them attractive for foreign investors.
- S Corp: S Corps are limited to 100 shareholders, and all shareholders must be U.S. citizens or residents. Additionally, S Corps cannot have partnerships, corporations, or non-resident aliens as shareholders, making them more restrictive for foreign ownership.
4. Management Structure
- LLC: LLCs offer flexibility in management. They can be managed either by the owners (members) or by appointed managers, making them ideal for businesses that prefer a less formal management structure.
- S Corp: S Corps must follow a formal corporate structure with a board of directors and officers, increasing the administrative burden but providing clear accountability.
5. Tax Filing Complexity
- LLC: LLCs can have relatively simple tax filings, especially for single-member LLCs. Multi-member LLCs file taxes as partnerships, but they can elect to be taxed as an S Corp or C Corp.
- S Corp: S Corps face stricter IRS regulations and must file corporate tax returns. Owners are required to pay themselves a “reasonable salary,” which increases filing complexity but can result in significant tax savings.
6. Self-Employment Taxes
- LLC: In an LLC, all income is subject to self-employment taxes (Social Security and Medicare). This can result in higher taxes for business owners, especially if profits are high.
- S Corp: In contrast, only the salary portion of an S Corp owner’s earnings is subject to self-employment taxes. The remaining profits are treated as distributions and are not subject to additional employment taxes, providing potential tax savings. This strategy, however, requires careful structuring and compliance with IRS rules regarding reasonable compensation. For more detailed insights, read our guide on S Corporation benefits.
7. Profit Distribution
- LLC: LLC members can distribute profits flexibly according to their operating agreement, allowing them to structure profit-sharing in ways that meet the owners’ needs.
- S Corp: S Corps must distribute profits strictly according to the ownership percentage, making profit-sharing less flexible compared to LLCs.
8. Ease of Formation and Costs in Texas
- LLC Formation Costs in Texas: Forming an LLC in Texas involves filing a certificate of formation with the state, which costs $300. Ongoing compliance costs include an annual report and state franchise taxes if applicable.
- S Corp Formation Costs in Texas: Forming an S Corp in Texas also requires filing fees of around $300 for a certificate of formation. Additionally, to elect S Corp status, you must file IRS Form 2553, but the filing itself is free. You can learn more about the S Corp formation process in Texas in our step-by-step guide.
9. Do S Corps Pay Texas Franchise Tax?
Yes, both LLCs and S Corps in Texas are subject to the state’s franchise tax. This tax applies to businesses that earn more than a specified threshold (over $2.47 million in annual revenue as of 2025). However, smaller businesses below this threshold qualify for the “no tax due” status, meaning they are exempt from paying the tax but must still file annual reports. This is a key consideration for Texas-based business owners. For more details on the S Corp vs. C Corp debate, you can check out our comparison.
10. State-Level Differences: Best States for S Corps
While LLCs and S Corps have similar benefits across the U.S., some states offer more favorable tax conditions:
- Texas: Texas is often considered a great state for forming S Corps due to no personal income tax. However, businesses must pay a franchise tax if their revenue exceeds the state threshold.
- Other States: States like Wyoming and Nevada have no corporate income tax, making them attractive for S Corps looking to minimize tax exposure.
11. Can a Texas LLC Be an S Corp?
Yes, a Texas LLC can elect to be taxed as an S Corp by filing IRS Form 2553. This election allows the LLC to benefit from the pass-through taxation of an S Corp while maintaining the flexibility and structure of an LLC. This can help Texas-based LLCs save on self-employment taxes while keeping the simplicity of an LLC. Learn more about this process in our S Corp formation guide.
12. Foreigners and LLCs in the U.S.
Foreigners can own LLCs in the U.S., but they cannot be shareholders of an S Corp. This makes LLCs a more attractive option for non-U.S. residents or foreign investors looking to form a business in the U.S. LLCs offer the same liability protection without the citizenship or residency restrictions that apply to S Corps.
Conclusion: Which Structure is Right for Your Business?
The choice between an LLC and an S Corp comes down to your specific business needs. If you value flexibility, a simpler management structure, and minimal administrative requirements, an LLC may be the best option. On the other hand, if you are looking for tax-saving strategies related to self-employment taxes and plan to have a formal corporate structure, an S Corp might be more suitable.
Ready to take the next step? Whether you’re forming a new business or restructuring an existing one, contact us for a free consultation, or explore our comprehensive resources on business formation in Texas:
We’re here to help you choose the right structure and ensure your business is set up for growth and success in 2025.
Frequently Asked Questions (FAQs)
The cost of forming an S Corp in Texas includes a $300 filing fee for the certificate of formation with the Texas Secretary of State. There are no additional costs for filing IRS Form 2553 to elect S Corp status, but you may face ongoing compliance costs depending on your business’s revenue, such as Texas franchise taxes.
Ideally, a shareholder agreement should be created when the corporation is formed. However, you can draft one at any time if your company does not already have one.
Yes, both S Corps and LLCs in Texas are subject to the state’s franchise tax. However, businesses that earn less than $1.23 million in annual revenue can file as “no tax due” and avoid paying the franchise tax, though they still need to file an annual report.
Yes, a Texas LLC can choose to be taxed as an S Corp by filing IRS Form 2553. This allows the LLC to benefit from the tax advantages of an S Corp, such as saving on self-employment taxes, while maintaining the operational flexibility of an LLC.
Foreigners can own LLCs in the U.S., and LLCs are often a preferred option because they don’t have the citizenship or residency restrictions that apply to S Corps. Non-U.S. residents cannot own shares in an S Corp.
States like Texas, Nevada, and Wyoming are often seen as advantageous for forming an S Corp due to their lack of personal income tax and favorable business climates. Texas, in particular, is a popular choice due to its lack of corporate income tax and relatively low franchise tax for businesses with modest revenues.
Self-employment taxes include Social Security and Medicare taxes, which LLC owners pay on all of their income. S Corp owners, however, can reduce self-employment taxes by paying themselves a reasonable salary (subject to payroll taxes) and treating the remaining profits as distributions, which are not subject to these taxes. This strategy can result in significant tax savings but requires careful compliance with IRS rules.
Forming an LLC is generally simpler than forming an S Corp. The LLC formation process involves fewer regulatory requirements and less ongoing compliance. Forming an S Corp requires additional steps, such as filing IRS Form 2553, and more strict compliance with corporate governance rules.
By addressing these FAQs, we aim to provide clear and actionable information to help you decide the best structure for your business. If you’re ready to take the next step, feel free to contact us for a consultation!
