Can an LLC Be an S Corporation: Everything You Need to Know
Can an LLC be an S corporation? The simple answer is yes. When an LLC operates actively as a business or trade and has high payroll taxes on the owner, an S corporation election could be the best option.3 min read
2. Understanding the LLC
3. Understanding the S Corp
4. S Corp Taxation
5. LLCs Taxed as S Corporations
Can an LLC be an S corporation? The simple answer is yes. When an LLC operates actively as a business or trade and has high payroll taxes on the owner, an S corporation election could be the best option. Legally in this case, the enterprise is an LLC and not a corporation. This provides easy administration, less paperwork, lower start-up costs, and easier record keeping with few meetings. However, from a tax standpoint, the enterprise is an S corp. This can provide a wealth of tax planning benefits.
Comparing the S Corp to the LLC
The following are similarities of the S corp and the LLC:
- Both an S corp and an LLC share a pass-through characteristic.
- They both provide limited liability defense to their owners.
Differences of the S corp and the LLC include the following:
- An LLC is easier for operation, administration, and flexibility in the allocation of profits.
- LLCs have lower start-up costs.
- LLCs don't require as many formalized meetings.
- LLCs have lower documentation requirements.
- S corps allow for a lot of flexibility in how earnings are paid — as opposed to simply being passive income, they can be issued as salaries and wages. This enables a superior approach to tax planning.
Understanding the LLC
An LLC is a new kind of business structure, established by individual states, that provides asset protection features of corporations, while making paying taxes very easy and straightforward — all profits are just counted against the members' income and treated as self-employment earnings. An LLC is not a taxable entity in the eyes of the IRS.
However, the LLC can choose to be taxed as a corporation by filing a Form 2553. Depending on the structure of the tax arrangement, the taxes on an LLC can vary. Without special forms, it's taxed as a sole proprietorship or partnership, with each member paying quarterly estimated taxes and self-employment tax.
Understanding the S Corp
An S corp is a kind of corporation formed under state incorporation laws that elects to use pass-through taxation for paying federal taxes. Owners of these companies report income and losses on personal tax returns, at individual tax rates, to avoid corporate double taxes.
To be an S corp, a company must be a U.S. corporation with no greater than 100 shareholders, which may only be individuals, estates, and certain kinds of trusts. An S corp may only have a single stock class, but the stock can be either voting or non-voting. Finally, there are certain institutions that can't be an S corp. These include some varieties of financial institution, domestic international sales groups, and insurance providers.
S Corp Taxation
The key benefit of the S corporation is that it has the ability to minimize a company's tax liability. The only taxes that are subject to the FICA tax are those wages paid as earned income. All other earnings that pass through are dividends and are not subject to the SECA tax nor considered passive income, as long as the shareholder participates within the business.
This allows S corporations to tax plan in ways you can't with an LLC. However, this comes at the expense of complex administration requirements with more paperwork, meetings, bylaws, and the like. There are also restrictions on profit sharing; earnings must be distributed based on the shareholders' capital contributions.
Each year, the S corp files form 1120S reporting the income, profits, deductions, losses, and credits to the IRS. Shareholders are provided schedule K-1, which lists their shares, and these then file schedule E on their 1040. The biggest risk for an owner is that owners are not considered employees for tax purposes. This means they may be double-taxed on profits they receive unless they provide significant services to the corporation.
LLCs Taxed as S Corporations
When an LLC is taxed as an S corp, they file form 1120S and each member reports their share of profits on their 1040 and files schedule K-1. Starting in 2018, owners can take a 20 percent personal deduction if the total taxable income is less than $157,500 for a single person or $315,000 for a married couple.
You can only opt for S corp status if you have a maximum 100 shareholders who are all U.S. residents, you have only one stock class, and no shareholders are other businesses. The process can be complex, and many people require legal advice to pursue this option.
If you need help with how an LLC can be an S corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.