Can an LLC Be an S Corp for Taxes?

Key Takeaways

• An LLC is a legal business entity, while an S corp is a federal tax classification—so the answer to “can an LLC be an S corp?” is yes, if the LLC elects S corp tax status with the IRS.
• LLCs taxed as S corps often reduce self-employment tax liability by splitting owner income into salary and distributions.
• Not every LLC benefits from electing S corp status—drawbacks include stricter IRS rules, higher administrative costs, and risks of disqualification.
• LLC ownership of an S corp is not allowed; only individuals and certain trusts/estates can be shareholders in an S corp.
• Key considerations include business size, net profit level, compliance requirements, and whether the LLC owners want flexibility or structured tax savings.

Is LLC an S corp? The answer is no, but you can combine the tax structure of an S corp with an LLC. An LLC is a legal business entity created under state laws so owners or a group of owners can operate a business. When compared to an S corp, it provides a number of advantages in the form of management flexibility and tax savings.

When it comes to LLCs, you should keep in mind the various forms they come in. For instance, an LLC owned by multiple owners are taxed by default as a partnerships, while sole-member LLCs are taxed as sole proprietorships.

With that, you may choose to have your LLC taxes as an S or C corporation.

An LLC has a default taxation method, but choosing an S corp classification comes with a certain number of benefits. S corps and LLCs are most notable for pass-through taxation, a process where profits and losses flow from the business to individual members or owners to file on their business or personal tax returns.

Tax Options

LLCs with a sole owner can be taxed as a corporation or sole proprietorship. LLCs with over one owner can choose a corporate a partnership taxation method. The IRS classifies LLC income in the following manner:

• Sole Proprietorships
• Partnerships

Note: There is no business entity that begins as an S corp. Rather, you must request S status through an election filing with the IRS. You would need Form 2553, but you need to meet the following conditions before applying:

• The business entity should have 100 shareholders or fewer.
• The entity cannot have non-resident aliens or anyone who does not reside in the U.S.
• The business entity should only have one stock type. For instance, no preferred stock is allowed, and special rights to shareholders are not allowed.
• An entity cannot be owned by other entities in the form of partnerships or corporations.

Such mandates are not an issue for smaller business. With that, you should file Form 2553 by March 15th if you want the S status to last for the entire year.

Moreover, S corps and LLCs can deduct from pre-tax business expenses in the form of:

• Uniforms
• Travel
• Phone Bills
• Promotion
• Advertising
• Car Expenses
• Healthcare Costs

Each state may have different rules regarding the formation of LLCs and/or S corps, which is why you should consult the services of an accountant or attorney if you are unsure which entity suits your business most.

When Electing S Corp Taxation Makes Sense

For many small businesses, the main appeal of electing S corp taxation is potential savings on self-employment taxes. Unlike a standard LLC, where all net earnings are subject to Social Security and Medicare taxes, an S corp allows owners to pay themselves a reasonable salary (subject to payroll taxes) and take the remaining profits as distributions, which are not subject to self-employment tax.

S corp election may be beneficial if your LLC:

• Earns net profits above $40,000–$50,000, where tax savings outweigh added costs.
• Has owners actively working in the business who can justify reasonable salaries.
• Plans to reinvest in the business or pay out consistent distributions.

However, if your business is new, has modest income, or reinvests heavily, the administrative costs of running an S corp (payroll setup, tax filings, and stricter recordkeeping) may cancel out any benefits.

Tax Filing

When it comes to S corp filing, you would need Form 1120S. This form records:

• Corporate Income
• Profits and Losses
• Deductions
• Tax Credit for that Year

In addition, shareholders must be given a Schedule K-1, which lists any item shares from Form 1120S. Shareholders must also file a Schedule E with a personal tax return (1040), showing corporate losses and income from the business.

Risks and Limitations of S Corp Status

While the IRS permits an LLC to elect S corp status, there are significant limitations to keep in mind. Common risks include:

• Eligibility Restrictions: An S corp cannot have more than 100 shareholders, cannot be owned by other LLCs, partnerships, or corporations, and cannot issue multiple classes of stock.
• Reasonable Compensation Requirement: The IRS closely monitors whether owner-employees are paid reasonable wages. Paying too little salary to avoid payroll taxes may result in audits and penalties.
• Complex Tax Reporting: Owners must file corporate returns, issue K-1s, and follow payroll tax rules, which increase compliance costs.
• Loss of Flexibility: Unlike LLCs that can allocate profits and losses in flexible ways, S corps must distribute strictly according to share ownership.

These drawbacks mean that while an S corp election can be tax-efficient for some, it is not universally advisable.

LLC and S Corp Guidelines

Overall, S corps come with additional rules you must adhere to. Keep in mind the following when choosing an S corp system:

• Adopt Bylaws
• Issue Stock
• Holding Shareholder Meetings
• Keeping Records
• Recording Meeting Minutes

The following are merely recommendations to LLCs, and such guidelines are not mandatory:

• Writing an Operating Agreement
• Membership Issuance
• Holding and Recording Meetings
• Documenting All Important Company Decisions

Compliance and Administrative Requirements

Electing S corp taxation increases the LLC’s compliance burden. Business owners must:

• Run payroll for themselves and employees, remitting federal and state employment taxes.
• File Form 1120S annually with the IRS and issue Schedule K-1s to each owner.
• Maintain clean, corporate-style records, including bylaws, meeting minutes, and shareholder agreements.
• Avoid prohibited shareholders (such as nonresident aliens or other entities) to maintain S corp status.

Failing to meet these standards can cause the IRS to revoke S corp election, reverting the LLC back to default taxation.

Management Style Differences

Regarding management structure, LLCs tend to have more flexibility than a corporation.

• LLC Management: LLCs can have members or managers run the business. A member-managed LLC is governed in the same way as a partnership. If the LLC is manager-managed, it is more aligned with a corporation, where members are not involved in daily business operations.
• S Corps: An S corp is governed under officers and directors. A board of directors reside over business affairs and maks important business decisions. Directors appoint officers who handle daily business operations.

Taxes and Withholding

Regardless of business structure, an owner or employee must be paid a salary or other means of compensation for all services provided. In addition, the employee/owner under an S corp should report any earnings on a personal tax return, and pay what’s owed on Medicare and Social Security taxes. Further, a corporation should withhold any employment or federal income tax from an owner/employee’s salary to pay for federal unemployment, Medicare, and Social Security.

Comparing LLC vs. S Corp Taxation Outcomes

The tax outcomes between a standard LLC and one taxed as an S corp vary:

• LLC Default: All earnings flow directly to members’ personal tax returns, with full self-employment taxes applied.
• LLC with S Corp Election: Members split income between salary (taxed with payroll taxes) and distributions (not subject to payroll taxes).

For example, an LLC with $100,000 profit may save thousands in self-employment taxes if the owner takes a $60,000 salary and $40,000 as distributions. However, the LLC must cover payroll processing, unemployment insurance, and accounting fees to remain compliant.

Frequently Asked Questions

1. Can an LLC be taxed as an S corp?
   Yes. An LLC can file IRS Form 2553 to elect S corp tax status, provided it meets IRS eligibility rules.
2. What are the benefits of an LLC electing S corp status?
   The primary benefit is reducing self-employment taxes by dividing owner income into salary and distributions.
3. What are the disadvantages of electing S corp status?
   Drawbacks include higher compliance costs, stricter IRS oversight, and reduced flexibility in allocating profits and losses.
4. Can an LLC own an S corp?
   No. Only individuals, certain trusts, and estates can own shares in an S corp—other entities like LLCs cannot.
5. When should an LLC not elect S corp taxation?
   If the LLC earns modest profits, reinvests heavily, or prefers flexibility in distributing profits, electing S corp status may not be beneficial.

Is LLC an S corp? To find out more, submit your legal inquiry to our UpCounsel marketplace. UpCounel’s top lawyers will help you determine the right tax structure for your business, or if a corporate or LLC legal entity is best for your business aspirations. Moreover, our lawyers will guide you throughout the tax filing process so you can meet your tax obligations on time and take advantage of any savings.