Key Takeaways

  • An LLC can elect to be taxed as an S corporation without changing its legal structure.
  • Electing S corp status can reduce self-employment taxes by allowing owners to pay themselves a reasonable salary and take remaining profits as distributions.
  • To qualify, an LLC must meet IRS requirements such as having fewer than 100 shareholders and only one class of ownership interest.
  • Choosing S corp taxation affects how owners are paid, how profits are distributed, and how payroll taxes are handled.
  • Not all businesses benefit from electing S corp status; the decision depends on profits, structure, and administrative capacity.
  • Form 2553 must be filed with the IRS to elect S corp status.

Can an LLC be an S corporation? Yes, in some cases it can be taxed the same. Even accountants and lawyers get caught up in the differences between various types of business. This is true especially when dealing with things like employer responsibilities, taxation, and asset protection. 

An LLC and an S corporation are two different kinds of entities, but there are certain situations where an LLC and a corporation crossover are treated the same. This can provide great advantages in tax planning and protection against double taxation for the company, so long as the owners are careful in the way they approach the arrangement.

What Is an LLC?

An LLC grants asset protection and liability defense like a corporation while providing the tax efficiency of a sole proprietorship, with a degree of operational flexibility. This structure is authorized by state statutes and is the newest form of business in the nation, as well as the most popular for small startups.

LLCs are pass-through entities. This means that the profits or losses of an LLC “pass through” to the owners, which are called “members.” You act just as if you were running a DBA or sole proprietorship: you report all profits and losses on your personal federal income taxes. This avoids the problem of double taxation that many corporations suffer, and usually at a lower tax rate.

Protection of Assets and Liability

While an LLC provides the tax flexibility of a sole proprietorship, it places an important limit on the personal asset liability each member holds, similar to a corporation. In general, your liability is going to be limited to whatever your investment in the LLC is. Under a sole proprietorship, if you end up with liability issues, your personal assets (your house, your car, and the like) could be at stake.

Other Benefits of an LLC

The following are other major benefits of an LLC: 

  • Ease of operation — there are fewer forms and filings and lower start-up costs, there are fewer required formal meetings, as there's no board of directors, and there are fewer requirements for record keeping.
  • Profit sharing that is less restricted; you can generally distribute profits as the members see fit, as opposed to basing them on capital contributions. 
  • The entire net earnings are treated as self-employment income when you pay taxes, so profit in an LLC is just that: profit.

What Is an S Corp?

An S corporation is formally incorporated under the state and elects to pass income, losses, credits, and deductions through to owners for taxation purposes. Owners report these income and losses to avoid corporate double taxation. S corps are subject to certain limitations: they must be based in the U.S. They can have no more than 100 shareholders (with all members of a family, including spouses, counted as a single shareholder). Shareholders can be only individuals, estates, and certain trusts and not partnerships, corporations, or non-resident aliens. They can have only one class of stock but can have both non-voting and voting stock. Finally, insurance companies, domestic international sales companies, and some financial institutions are ineligible to be an S corp. 

S corp earnings are dividend income, which means they are not taxed as self-employment and thus are at a lower tax rate.

How an LLC Can Elect S Corporation Status

An LLC does not need to form a new corporation to gain the tax benefits of an S corp. Instead, it can file Form 2553, Election by a Small Business Corporation, with the IRS to be taxed as an S corporation while retaining its LLC legal structure. This election changes only the way the business is taxed, not its management structure or liability protections.

To qualify for S corporation taxation, the LLC must meet certain IRS criteria, including:

  • Being a domestic entity.
  • Having no more than 100 owners (members).
  • Having only eligible shareholders—individuals, certain trusts, and estates (but not partnerships, corporations, or nonresident aliens).
  • Issuing only one class of ownership interest, though voting rights may differ.

If the LLC meets these conditions and files Form 2553 (usually within 75 days of the beginning of the tax year), it can be taxed as an S corporation starting that year.

LLC vs. S Corp: Similarities and Differences

Both LLCs and S corps have the benefit of pass-through income, and both protect their owners against liability in regards to personal assets. As we've seen above, however, an LLC carries the advantage of being easier to operate, administrate, and allocate profits and losses.

 Where, then, does an S corp have advantages? The S corp has more flexibility in terms of paying earned income to owners in the form of wages, salaries, and distributions, and in terms of tax planning, an S corp can have more favorable tax rates if properly established.

Benefits of Electing S Corporation Status for an LLC

When asking can an LLC be an S corp, one of the main reasons to consider it is potential tax savings. While standard LLC members pay self-employment tax on all business profits, an LLC taxed as an S corporation can divide income into salary and distributions.

Key benefits include:

  • Reduced Self-Employment Taxes: Only the owner’s salary (not profit distributions) is subject to Social Security and Medicare taxes.
  • Continued Pass-Through Taxation: The LLC’s profits still pass through to owners’ personal returns, avoiding corporate double taxation.
  • Flexible Profit Distribution: Owners can balance between wages and distributions for tax efficiency.
  • Retained Limited Liability: The LLC continues to protect members’ personal assets from business debts.

However, owners must pay themselves a “reasonable salary” based on IRS standards. Setting an artificially low salary to avoid payroll taxes can trigger IRS penalties.

Treating an LLC Like a Corporation

You can, after setting up an LLC, have it treated like an S corp. If the business is an active trade, with high payroll taxes, your LLC can remain an LLC for legal purposes but have it treated like an S corporation for taxation. You can still have pass-through but also gain more advantageous tax planning and better tax treatment for fringe benefits.

However, the owner will be subject to double taxing in this case, so you will want to be sure the tax savings will be significant. It's not an easy decision to make, and you'll want the best legal help available.

Drawbacks and Considerations of S Corp Election

Although an S corp election can lower taxes, it also adds administrative complexity. Before deciding, business owners should evaluate both the advantages and potential drawbacks:

Drawbacks include:

  • Increased Payroll Obligations: Owners who pay themselves a salary must handle payroll tax filings, withholdings, and quarterly payments.
  • Additional Accounting Costs: More detailed bookkeeping and payroll processing may require professional assistance.
  • Strict Eligibility Requirements: Violating ownership or stock-class restrictions can terminate S corp status.
  • Unequal Profit Distribution Limits: S corps must allocate profits based strictly on ownership percentage, unlike LLCs that can distribute profits flexibly.

In general, LLCs with higher net income (typically $60,000 or more) benefit most from S corp taxation due to payroll tax savings. Smaller or less profitable LLCs may find the additional administrative work outweighs potential savings.

How to Elect S Corporation Status

The process for an LLC to elect S corporation status is relatively straightforward:

  1. Confirm Eligibility: Ensure the LLC meets IRS S corp requirements.
  2. File Form 2553: Submit Form 2553 (Election by a Small Business Corporation) to the IRS, signed by all members.
  3. Consider Timing: The form must be filed within 75 days of formation or by March 15 for existing entities to take effect in the current year.
  4. Adjust Payroll and Accounting: Set up a reasonable salary for owner-employees and ensure compliance with payroll tax requirements.
  5. Review State Requirements: Some states require a separate S corp election or recognition.

It’s recommended to consult a tax professional or business attorney before filing to determine whether this election aligns with your financial goals and to avoid IRS compliance issues.

When Should an LLC Elect S Corp Status?

Deciding when to switch from an LLC to an S corp depends largely on the company’s income and growth stage. Many experts suggest that an S corp election becomes beneficial when:

  • The business generates consistent profits beyond the owner’s reasonable salary.
  • The owner wants to reduce self-employment tax liability.
  • The company expects to hire employees or take on higher payroll expenses.
  • The business is stable enough to handle increased compliance and accounting responsibilities.

In contrast, startups and businesses with irregular income may prefer to remain a standard LLC until profits justify the added complexity.

Frequently Asked Questions

  1. Can an LLC be taxed as both a partnership and an S corp?
    No. While a multi-member LLC is typically taxed as a partnership by default, it can choose to be taxed as an S corporation instead—but not both simultaneously.
  2. Do I have to form a corporation to be an S corp?
    No. An LLC can retain its legal structure while electing to be taxed as an S corporation. The change affects taxation, not business organization.
  3. How much income should an LLC earn before choosing S corp taxation?
    Generally, S corp status becomes worthwhile when net profits exceed roughly $60,000–$70,000 annually, but exact savings depend on your salary allocation and expenses.
  4. Does S corp election affect liability protection?
    No. Electing S corp taxation does not change the LLC’s limited liability protection; it only alters how the entity is taxed.
  5. How do I know if S corp status is right for my LLC?
    Evaluate factors such as profitability, growth, and administrative capacity. You can consult a qualified tax professional or find an attorney on UpCounsel for help deciding if S corp election is the best fit for your business.

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