Proposed IRS regulations (which Congress has placed on indefinite hold) would impose the self-employment tax on an LLC owner's entire share of LLC profits in any of the following situations:

• The LLC owner participates in the business for more than 500 hours during the LLC's tax year.
• The LLC provides professional services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting (no matter how many hours the owner works).
• The LLC owner is empowered to sign contracts on behalf of the LLC.

Until the IRS clarifies the rules on self-employment tax for members of an LLC, you should assume that 100% of an LLC member's earnings will be subject to the tax.

Therefore, an S corporation shareholder may pay less self-employment tax than an LLC member with similar income. You'll need to decide if this potential tax saving is enough to offset such LLC advantages as less formal record keeping and flexibility in management structure and in the method of distributing profits and losses.