Can Llc Be Taxed As S Corp: Everything You Need to Know
An LLC, or limited liability company, is a legal business entity designed to limit your personal risk while still allowing you to do business with your own company.3 min read
2. S Corporation Features
3. S Corporation Limitations
4. Benefits of an LLC Electing to be Taxed as an S Corporation
5. How to Elect S Corporation Status
6. How to Get Your LLC Taxed as an S Corporation
An LLC, or limited liability company, is a legal business entity designed to limit your personal risk while still allowing you to do business with your own company. An LLC is much easier to create and easier to run than a corporation, since a corporation requires a lot of oversight and must have an executive board of directors. Meanwhile, an LLC can be run entirely by a single person. Typically, LLCs are taxed as either a sole proprietorship with one owner or a partnership with more than one owner. However, it may be possible to get your LLC taxed as an S corporation. All you have to do is file a document with the IRS.
When you create an LLC, you can enjoy the profits of the business without being personally liable for all losses incurred. There are limits, of course, to the extent of your investment. LLCs are easier to run than corporations because you don't need to have as many forms or as much money to start up, and you don't have to report as much information or hold as many meetings. Profits can also be distributed based on consensus rather than based on how much members have contributed. One of the main benefits of an LLC is that the structure features pass-through income to owners, which eliminates any double taxation since the owners are only subject to self-employment income.
S Corporation Features
An S corporation exists independently of its owners as a separate entity creating liability protection for its owners and shareholders. Shareholders are the most distinguishing feature between S corporations and LLCs. While an LLC is made up of members, an S corporation is run by shareholders. This distinction creates more complex operation requirements. You'll need to have mandatory meetings with shareholders and keep more detailed records. Earnings are also distributed proportionally to shareholders' investments.
S Corporation Limitations
S corporation designation does have a few limitations on it, however, so be prepared to comply with these if you want S-corp status.
Must be a corporation based in the U.S.
Must have no more than 100 shareholders
Shareholders must not be corporations, partnerships, or nonresident aliens
Must have only a single class of stock
Certain insurance companies, sales corporations, and financial institutions are completely ineligible
Benefits of an LLC Electing to be Taxed as an S Corporation
It is possible to simply use the S corporation designation for tax purposes rather than as an organizational basis. Electing to have your LLC taxed as an S Corporation can offer the following benefits:
You'll still legally be an LLC with cheaper and easier start-up costs.
Only taxation will be affected by S corporation designation.
You can run your business like an LLC without S-corp regulations like meetings and reporting.
The remaining earnings after normal FICA-subject pay can be distributed to owners tax free as passive dividend income.
As you might expect, there also certain disadvantages to being taxed as an S corporation. For example, S corporations face heavy scrutiny from the IRS to make sure that payments are not being improperly characterized. S corporation stocks are also restricted to a single class, which limits the availability of investors. It's important to weigh the advantages and disadvantages of S-corp taxation before proceeding.
How to Elect S Corporation Status
If you want S corporation status, you have to file a form with the IRS stating you have elected for S corporation status. All that's required is the IRS Form 2553. Your business must also stay within all the S corporation limitations as detailed above.
How to Get Your LLC Taxed as an S Corporation
To elect for S corporation taxation, you need to use IRS Form 8832, also known as the Entity Classification Form. All LLCs are eligible for this form. Make sure you elect to be an association. To the IRS, that means you're an eligible entity taxable as a corporation. There's a consent statement within the document that all members must agree with either by electing someone to sign on their behalf or by signing all their individual names.
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