Is LLC an S Corp?: Everything You Need to Know
An LLC is not an S corp but you can combine the tax structure of an S corp with an LLC.3 min read
2. Tax Filing
3. LLC and S Corp Guidelines
4. Management Style Differences
5. Taxes and Withholding
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.
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.
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
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:
- Phone Bills
- 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 it comes to S corp filing, you would need Form 1120S. This form records:
- Corporate Income
- Profits and Losses
- 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.
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
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.
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.