Can LLC Be S Corp: Everything You Need to Know
If you're asking, “Can an LLC be an S corp for tax purposes,” you're not alone, and the answer is yes, it can. 3 min read
2. What S Corp Status Means
3. Potential Single Class Stock Issues
4. Pass-Through Tax Deductions
5. Paying S Corp Taxes as an LLC
If you're asking, “Can an LLC be an S corp for tax purposes,” you're not alone, and the answer is yes, it can. But you need to carefully consider what the best approach for your business is, and the means by which you can elect S corporation status. Even attorneys and accountants debate about the benefits of LLCs treated as S corps, and it's important to understand that no business automatically starts out with S corporation taxation. Even if you incorporate from the start, you'll need to file an election with the IRS to get there. You can establish your LLC and then elect to be treated as an S corp.
How to Elect S Corporation Status
S corporation status is allowed for an LLC only under certain circumstances:
- Your company may have no more than 100 shareholders.
- None of these shareholders can be nonresident aliens.
- Your business must have only one class of stock — you cannot have stock that is preferred and grants special rights.
- None of the shareholders in your company may be other corporations or partnerships.
If you meet these qualifications, you can claim S corporation status by filing form 2553 by March 15; your filing will then be retroactive back to January 1. If you make this election, you are considered by the IRS to have transferred all company assets and liabilities in exchange for stock, which will then be distributed to owners in liquidation. This transfer is tax-free, assuming your LLC's liabilities don't exceed its assets. If your members are eligible to hold stock, you can then elect S status.
What S Corp Status Means
Companies that make this election are classified as a corporation from the date the S election becomes effective, and they continue in this manner until you make a different classification. If you choose to change classifications in this way, you can't do so again for another 60 months, unless you get permission from the IRS.
When you choose this status, you are considered to have liquidated, as stated above, just before the close of business the day before your election comes into effect.
Potential Single Class Stock Issues
When you elect S status for your LLC, it's vital that your operating agreements conform to the requirements of S corp eligibility. Any earlier documents based on treatment as a partnership must be replaced or amended. There can be no special income allocations or special profit distributions — every member must be of the same stockholder class, except for voting vs. non-voting shares, which can remain in play.
Pass-Through Tax Deductions
The new tax laws in 2018 establish a new pass-through tax deduction that is beneficial to those electing S status. Owners of these entities can now deduct up to 20 percent of net business income from taxes — it's a personal deduction available to both standard deduction and itemized returns. However, it is only available for those who make less than $157,500 if they are single or $315,000 for married couples.
For businesses with incomes of over $207,500 (for singles) or $415,000 (for married couples), the pass-through deduction is only available if the business owns property or pays employee salaries and wages.
Paying S Corp Taxes as an LLC
An LLC that elects S status must file form 1120S U.S. Income Tax Return for an S corporation. Every member is also required to report all profits they gained on their personal 1040 and schedule K-1 forms to report their share of income, credits, and deductions. S corporation treatment can be a way to remove money from the business without the need to pay employment taxes, and it's the only kind of business that allows for owners to save money on Medicare and Social Security taxes.
The Social Security and Medicare taxes for employees in these companies are the same as those for self-employment, but it is paid differently. The employer pays half, and the employee has half deducted from their paycheck. If you are the owner of the company, however, you both pay half and deduct half. This means that owners will pay more taxes than employees. So, it's important to ensure that the savings you will gain overall on your S status will offset the higher personal tax rate.
If you need help understanding how an LLC can be an S corp, 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.