An LLC can be taxed as an S corp by filing the Entity Classification form to the IRS. The choice to be treated as an S corporation is normally taken to maximize savings on federal taxes. LLCs that are treated as S corporations still keep the simple management structure they had before the filing.

Why an LLC May Want to Be Treated As a Corporation

The IRS does not levy taxes on LLCs as entities but instead taxes the earnings of each member. S corporations, likewise, enjoy pass-through status and only pay taxes on the personal earnings of the owners. Both business types are not subject to the form of double taxation prevalent in C corporations.

Change of Financial Goals

Most businesses designed to hold and protect assets, but don't earn substantial profits, will pay minimal taxes if they file as LLCs. The goals of the LLC or its financial situation might change with time. The payroll taxes on the members may become too high or the LLC might earn big profits. This might necessitate the LLC to request to be treated as an S corporation. 

Tax Issues

Most businesses are required to withhold federal income taxes and employment taxes from employees. They must also withhold and pay Social Security and Medicare (SECA) taxes and federal unemployment taxes on the employees' behalf. Businesses treated as S corporations have the advantage that owners who work for the business are treated as employees for purposes of payroll taxes. The income they receive as earnings is exempt from these taxes, thus helping them to save on taxes. This makes being treated as an S corporation an attractive option for many LLC owners who get high profits. 

LLCs Treated As S Corporations: The Benefits

Tax savings

  • Businesses classified as S corporations don't need to pay self-employment taxes, Medicare taxes, and Social Security taxes on the money owners take out of the business as earnings. This provision is only available to businesses taxed as S corporations and may help business owners to save thousands of dollars every year.
  • Employee-members of businesses taxed as S corporations can easily qualify for pass-through entity tax deductions since they are treated as employees by the IRS.
  • The company still avoids double taxation which is a hallmark of C corporations.

They Keep the Advantages of LLCs 

LLCs that have elected to be treated as S corporations are still legally LLCs and maintain some advantages of LLC businesses

  • They still have less stringent record-keeping requirements, filings costs, and formal meeting requirements compared to corporations.
  • The owners still have their liability protection.
  • The LLC might still maintain a measure of flexibility in the allocation of profits and losses.

How to Register an LLC to Be Taxed As an S Corporation

LLC owners that choose to have their company treated as an S corporation must file the Entity Classification Election, Form 8832. The effective date for the change cannot be more than 75 days before the official decision is taken, nor can it come after more than a year after the LLC elected to be treated as an S corporation.

If the LLC had already elected to be treated as a corporation, then you need to file the Election by a Small Business Corporation, Form 2553, to be treated as an S corp. Form 2553 is enough if the LLC decides to be treated as a corporation and S Corporation on the same day and in the same filing. 

Disadvantages of an LLC Being Treated As an S Corporation

The LLC Might Need to Make Changes

The operating agreements of LLCs that decide to be treated as S corporations must conform to requirements of S corporations. Therefore, the document might need to be amended to accommodate the requirements of an S corporation. The company might also need to make structural changes to conform to the requirements. For example, an S corp must have one class of stock. An LLC might have to make structural changes to conform to this requirement. 

Restrictions on Ownership

An S corp cannot have entities other than individuals who are U.S. citizens or legal residents as owners. An LLC that is treated as an S corp must naturally follow these requirements. This might limit sources of funding in the future.

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