There are a number of advantages and drawbacks to making an S corporation election, however, most of the time it works in the favor of the owner. In situations where an LLC is owned 100% by an individual, the LLC is a disregarded entity for U.S. tax purposes, which means the LLC does not file its own tax return. The income and expense is reported on Schedule C and attached to the individual owners' Form 1040. All of the earnings are subject to federal income taxes as well as self-employment taxes.

If the owner files an S corporation election via Form 2553, the LLC is now a regarded entity for U.S. tax purposes. The LLC files an annual Form 1120-S and the net income (loss) is passed through to the individual owners' Form 1040. Earnings are subject to federal income taxes, but they are not subject to self-employment taxes. If the 100% owner of the S corporation actively participates in the business, the owner will need to pay themselves a reasonable salary, which will be subject to U.S. federal payroll taxes on the wages. Reasonable compensation issues can be complex with S corporations, so it is best to consult a tax professional when setting your salary.