Can an LLC Be an S Corp: Everything You Need to Know
Are you wondering, can an LLC be an S corp? An LLC can be an S Corp if the LLC elects S Corporation status with the IRS by filing Form 2553.4 min read
2. How the IRS Views an LLC
3. LLC Versus S Corp
4. Converting an LLC to an S Corp
What Is an LLC?
LLCs are a pass-through entity unless they choose tax status as a C Corporation (C Corp), meaning that profits pass through to the members or owners of the company and are subject to their individual taxes filed in their federal tax returns.
This pass-through characteristic of LLCs protects profits from being taxed twice, once as the corporation's profits, and again as the individual profits.
The LLC structure also protects the members from financial liabilities in the case that the business goes under. Owners and members of an LLC are only liable for whatever funds they put into the company, not the entire business debt as with a sole proprietorship or general partnership.
An LLC can be a great option for business structuring due to the following benefits:
- Protection from liability for owners or members.
- Avoids double taxation on profits (if not elected to be a C Corp).
- Easier operations with fewer filing requirements, costs for start-up, requirements for record keeping.
- All profits of the LLC pass through to members as income under self-employment and are subject to self-employment tax.
How the IRS Views an LLC
The way an LLC is taxed depends on the structure agreed upon between the business entity and the IRS (Internal Revenue Service).
- C Corp — a corporation that is subject to taxation itself and the profits distributed to members are also subject to taxation.
- S Corp — a corporation in which the members are taxed for the profits of the company even if the profits aren't distributed to the members.
- Partnership — an LLC with more than one member or owner in which the members are taxed for the profits of the LLC, so the LLC itself is not subject to taxation.
- Sole Proprietorship — an entity not separated from its owner (disregarded entity) so all of the profits and losses of the company are viewed as the profits and losses of the owner. This applies to single-owner or single-member LLCs.
LLC Versus S Corp
As an individual prepares to either start a business or change the structure of their business, they'll first want to compare LLCs and S Corps. These structures have many similarities and differences.
Here are some characteristics that LLCs and S Corps have in common:
- Both offer liability protection for their owners or members making sure that they are not held responsible for all business debt.
- Both are treated legally as separate entities when filed with the state.
- Both are pass-through entities, meaning that they avoid double taxation on company profits.
- Both are under state requirements for annual filings and fees.
Here are some characteristics that LLCs and S Corps do not share:
- S Corps are limited to 100 owners or shareholders, while LLCs can have unlimited owners or members.
- Shareholders of S Corps must be citizens and residents of the United States, but members of LLCs may be non-citizens of the United States.
- C Corps cannot own S Corps, as owners of S Corps must be actual individuals, but LLCs can be owned by other business entities.
- LLCs are not restricted in their subsidiaries.
- S Corps are required to follow internal formalities like creating bylaws, distributing stock, holding annual meetings with minutes, and keeping corporate records.
- LLCs are encouraged, but not required to follow formalities like, filing an operating agreement, distributing member shares, keeping annual meetings, and logging major decisions made within the company.
- S Corps continue their entity existence, while LLCs usually have to file a dissolution date with their documents of formation and can dissolve with the loss of an owner or member.
- S Corps have easy and free transformation of stock, while LLC members must vote and agree on any stock or ownership transfers.
Converting an LLC to an S Corp
LLCs must meet the following requirements before being able to elect S Corp status with the IRS:
- It can't have more than 100 owners or members.
- It can't have alien or nonresident owners or members.
- All owners or members must be individual people, not business entities (except for nonprofits).
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