An LLC is a legal structure
A limited liability company is formed under state law. In Virginia, you form it with the State Corporation Commission. It separates your business from your personal assets, but on its own it doesn’t decide how you’re taxed.
How an LLC is taxed by default
- Single-member LLC: treated like a sole proprietorship. Profit goes on Schedule C of your personal return, and you pay self-employment tax on it.
- Multi-member LLC: treated as a partnership. It files Form 1065 and gives each member a Schedule K-1.
What an S-Corporation election changes
An eligible LLC or corporation can elect to be taxed as an S-Corporation with the IRS. Profits still pass through to the owners, but an owner who works in the business is paid in two ways:
- a reasonable salary through payroll, with payroll taxes withheld, and
- distributions of remaining profit, which are not subject to self-employment tax.
That split is where the potential savings come from. The salary has to be reasonable for the work you do; the IRS can challenge a salary that is set too low.
The extra costs
- Running payroll, with quarterly payroll filings and year-end W-2s
- A separate business return (Form 1120-S), due March 15 for calendar-year companies
- A Virginia pass-through return (Form 502)
- More careful bookkeeping and separation of business and personal money
When does an S-Corporation make sense?
Usually when the business makes steady profit well above what would be a reasonable salary for your role, so the tax saved on distributions outweighs the extra costs. For a new or low-profit business, staying with the default is often simpler.
Timing matters too. The election (Form 2553) generally has to be made within two months and 15 days of the start of the tax year it should apply to. Missing it can delay the savings by a year, so talk to us before you decide.
Thinking about an S-Corporation election? We run the numbers with your actual profit before you decide. Business tax returns · Tax planning.
General information, not tax or legal advice for your situation. Last reviewed November 2026.