What is the difference between an LLC and an S-corp?

The comparison is a category error that costs people real money. An LLC is a legal entity formed under state law. An S-corporation is a federal tax election filed with the IRS, and an LLC can make that election while remaining an LLC. So the actual question is not which entity to form but whether an entity you already have should elect S-corp taxation.

The mechanic behind the election is self-employment tax. A default LLC owner pays self-employment tax of roughly 15.3 percent on all net business profit, covering Social Security and Medicare. Under an S-corp election, the owner becomes an employee, takes a reasonable salary subject to payroll taxes, and can take remaining profit as a distribution that is not subject to self-employment tax. On substantial profit, that difference is meaningful. The IRS requires the salary to be reasonable for the work performed, and paying yourself an artificially low salary to maximize distributions is a well-known audit trigger with penalties attached.

The costs on the other side are why this is not automatic. An S-corp election requires running actual payroll with withholding and quarterly filings, a separate business tax return, and usually a bookkeeper or accountant, which commonly runs a few thousand dollars a year in compliance. Most practitioners put the break-even somewhere in the range of roughly 40,000 to 80,000 dollars of net profit, below which the compliance cost exceeds the tax saving. There are also restrictions: S-corps are limited in number and type of shareholders, cannot have foreign owners, and some states tax them in ways that erode the federal benefit. This is a genuine case for running the numbers with a CPA rather than following a rule of thumb.