Can an LLC Filed As an S Corp: Everything You Need to Know
Are you wondering, "Can an LLC file as an S corp?" An S Corporation is a company that elects to pay its taxes under the governance of Subchapter S of Chapter One of the IRS code. 3 min read
2. Who Would Benefit
3. Significant Differences
5. S Corporations
6. Combining Them
Are you wondering, "Can an LLC file as an S corp?" An S Corporation is a company that elects to pay its taxes under the governance of Subchapter S of Chapter One of the IRS code. This arrangement sees the company accept certain restrictions on stock configuration and ownership in exchange for this consideration. This differs from LLCs, or Limited Liability Companies, wherein the business is treated as privately-owned by an individual for certain tax and income related purposes, and as a corporation for liability purposes.
The Best of Both Worlds
Sometimes, a business may want to function as an S Corporation for tax purposes and an LLC for others. For instance, an S Corporation allows partners to not count their pass-through income as self-employment income when it is time to pay taxes. Thankfully, there are ways to set up your company so it is an S Corporation and an LLC at the same time.
Who Would Benefit
Many kinds of LLCs would benefit from an S Corporation filing. One example is a business with a high payroll tax percentage. Often, this will make an S Corporation election the ideal status for paying those taxes.
While S Corporations share characteristics like liability protection and pass-through income, there are also some serious differences between the two that business owners need to be aware of. These include:
- LLCs tend to be easier to manage and operate.
- LLCs allow more flexible assignment of profits and losses to the owning partners.
- S Corporations, on the other hand, are more flexible when it comes to how payouts to partners occur, whether as regular paychecks or profit sharing.
- S Corporations are better for tax planning.
LLCs are governed by state statutes and were created to offer both tax efficiency and liability control. While an LLC can elect to take tax treatment as a corporation, if it chooses not to do so, it becomes a pass-through entity, meaning its earnings count directly as income by its owner or owners.
Since corporations can sometimes end up being double-taxed, this is advantageous. At the same time, the personal liability of the owners is capped by how much they have invested, keeping the owners out of protracted legal battles that can easily bankrupt a private individual. Regular partnerships, of course, result in owners being fully liable for any problems with the company.
Beyond that, LLCs also face fewer restrictions on profit sharing and governance, compared to other configurations. Furthermore, there is less paperwork and complications when filing state taxes as an LLC. However, it is important to understand that, in terms of federal tax, the IRS does not recognize the LLC as distinct. For federal filings, you'll need to look at options like the S Corporation.
The S Corporation, on the other hand, is a tax configuration created by the IRS. By electing to file under the S subchapter, the company allows income to pass through to owners or shareholders, avoiding double dipping in much the same way as an LLC. In return, the company agrees to the following limitations:
- The company must be American or US-based, and all owners or shareholders must be US citizens.
- The company can only have 100 shareholders, though family members and spouses all count as a single entity for this purpose.
- Shareholders have to be individual people, and not investment funds or trusts or the like.
- The company cannot have different classes of stock, beyond simple voting and non-voting.
- Some kinds of insurers, international concerns, and financial houses are not allowed to file as an S Corporation.
The big difference for an S Corporation is that only the wages it pays count as earned income for payroll taxes, potentially reducing tax liability by a lot. LLCs on their own cannot do this, but tend to have a much more simplified filing for state taxes. A combined LLC and S Corporation, which abides by the rules of both, can reap both benefits, provided the company is careful to follow the eligibility requirements. If you think your business could do so, you should look into your filing status today.
If you need help with determining if your company should consider filing as an LLC or 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.