Form 2553 LLC: Everything You Need to Know
Form 2553 LLC refers to the IRS form used by LLCs to elect to be considered an S corporation for tax purposes. 3 min read
2. LLCs and S Corporations: Key Differences
3. How to Elect S Corp Status
4. How to Elect S Corp Status for LLCs Treated as Partnerships
LLC Default Taxation
Form 2553 LLC refers to the IRS form used by LLCs to elect to be considered an S corporation for tax purposes. This election occurs when a business owner feels that the tax treatment of an S corporation would be more beneficial to their LLC than being taxed as a disregarded entity or partnership, which are the two default IRS designations for LLCs. Such a decision in many ways splits the difference between the LLC and the corporate structures: each have their own benefits, and electing to be an LLC taxed as an S corporation combines many of both.
LLCs and S Corporations: Key Differences
LLCs enjoy great popularity among business owners for a number of reasons. They are usually easier to run, have lower start-up costs, less ownership restrictions, fewer state forms and filings, and fewer documentation requirements or formal meetings than S corporations. For business owners who don’t want to deal with the administrative complexities of the corporate structure, this can be seen as a big plus.
Nonetheless, many business owners see the S corporation tax advantages that outweigh the many benefits of the LLC. For instance, the S corporation offers greater flexibility when it comes to the distribution of earnings. In an LLC, all the net earnings get passed on to the owners as self-employment income that is then subject to self-employment tax. In an S corporation, on the other hand, one can divide the earnings into salaries and passive income (distributions). In this set up, only the salaries are taxed.
Because of these two sets of advantages, choosing between LLC and corporate status can be difficult, but fortunately, there is a third option, which is to elect to have your LLC taxed as an S corporation. In this set up, one can enjoy the operational benefits of the LLC as well as the taxation benefits of the S corp. Additionally, if you are an LLC electing S corp status, there are two more benefits you will gain:
• You can avoid the double taxation that corporations deal with.
• You, as an owner of an LLC, are separate from your business and can be considered an employee of that business. As such, payroll taxes will be withheld from your income, which benefits owners of profitable LLCs that have high self-employment taxes.
How to Elect S Corp Status
• Complete a series of questions that will determine whether your business is eligible to take the S corporation election.
• Select your current tax entity and then the type of tax entity you desire.
• Read the consent statement and sign the document. Have the other members of your LLC sign it if you are in a multi-member LLC.
Once this is done, all you have to do is submit the document to the IRS. This should be done no longer than two months and 15 days after the start of the tax year.
How to Elect S Corp Status for LLCs Treated as Partnerships
If your LLC is treated as a partnership and you wish to elect S corporation status, the process of election will be a little different. In such a process, when you elect the S corporation, the partnership is handled as if it has contributed all its liabilities and assets to a corporation and received stock in return. It is then considered to be liquidated by having the stock distributed to its partners by the end of the day the election occurred.
Thus, if this process occurs at the beginning of the tax year, the liquidation and contribution will be treated as if they happened immediately prior to the end of the previous tax year, and the LLC partnership will be considered an S corporation for that year, without any interim period of being a C corporation.
Before a partnership does go down this route, however, one should be aware that although the business will still be able to pass through its losses and gains to its owners, S corporation pass-through rules prevent special allocations from being allowed.
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