LLC as an S Corp: Everything You Need to Know
To classify your LLC as an S-corp for tax purposes, you need to file IRS Form 8832. 3 min read
2. LLC and S-Corp Differences
3. LLC as an S-Corp
4. What Is an LLC?
5. What Is an S-Corp?
To classify your LLC as an S-corp for tax purposes, you need to file IRS Form 8832. This special tax treatment allows your LLC to be taxed as a corporation, but all else remains the same in your LLC. An LLC is not a taxed entity, so the form is used to tax a Limited Liability Corporation as a corporation.
LLC and S-Corp Similarities
An S-corp and an LLC share the benefit of "passing through" all income directly to the business owners. Both of these forms of organization offer limited liability protection to the owner or owners.
LLC and S-Corp Differences
Regarding allocation of losses and profits among owners, an S-corporation is less flexible than an LLC. While both LLCs and S-corporations allocate earnings as distributions or earned income, an S-corporation is more flexible. An S-corporation would be a better choice than an LLC for the purpose of tax planning.
LLC as an S-Corp
Once you've created your LLC, you can elect to have S-corporation treatment. Filing the Entity Classification Election, or Form 8832, will allow you to elect your LLC to receive a specific tax treatment, turning it into a business that is taxable as a corporation. When this step has been completed and you are taxed as a corporation, your LLC may file an Election by a Small Business Corporation, or Form 2553, to be treated as an S-corporation.
There are great advantages to having an LLC as opposed to a corporation:
- Spend less time filing forms
- Spend less money on establishing the startup
- Less formal meetings to attend
- Less stringent requirements for record keeping
The enterprise you own will avert double taxation just as a partnership and proprietorship would because the income passes through; your company will be treated like an S-corporation from a tax perspective. When your business is treated as an S-corporation, you enjoy the advantage of benefits that reduce your tax liability for you and your business, so your business can enjoy fringe benefits.
When an LLC is taxed as a corporation, the owner does not have to have the full amount of company income on his or her individual tax return. Note that if you have an LLC taxed like a corporation, you will be in a double taxation situation. Make sure that the reduced tax amount is large enough to make this option worthwhile.
An LLC is considered one of the "eligible entities" able to file Form 8832. All members or owners of an LLC can sign the consent statement of Form 8832, or one member can sign on the behalf of all the other members. If one member signs on the behalf of all other owners, a record will need to be created that members approved this decision. Owners or members of the LLC will need to include specific information on Form 8832; a single owner will need to provide his or her Social Security number, while multiple owners should provide their EIN or Employer ID Number.
What Is an LLC?
The statutes across states authorize and validate the LLC business structure. An LLC offers its owners the limited liability that is normally afforded to a corporation, as well as the flexibility of operation and tax efficiency that you get with a general partnership or sole proprietorship.
An LLC is a pass-through entity unless it elects to receive the tax treatment of a corporation; otherwise, all profit and loss the LLC incurs will go to the members or owners. All members report their share of the profits and losses of the business on their own individual tax return, avoiding double taxation. There is a limit to the amount of personal liability protection an LLC provides its members; this is the same way a corporation behaves.
What Is an S-Corp?
All compliance with state regulations is observed when an S-corporation is formed; this allows the business to elect to pass income, credits, deductions, and losses to shareholders or owners — a federal tax benefit. All owners or shareholders of an S-corporation has to report the income and losses of the business on their individual tax return; each shareholder is taxed according to their individual tax rate.
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