LLC Electing S Corp: Everything You Need to Know
An LLC electing S corp status typically occurs when the LLC owners prefer the administrative structure of a limited liability company but would like to be treated as an S corp, or partnership, for tax purposes.3 min read
An LLC electing S corp status typically occurs when the LLC owners prefer the administrative structure of a limited liability company but would like to be treated as an S corp, or partnership, for tax purposes. S corp status is often preferable because the owner will not be required to pay self-employment tax on income and distributions from the partnership.
An LLC owner simply needs to select the appropriate box on his or her tax forms to be considered a corporation. All assets and liabilities will be transferred to the corporation in exchange for stock, which is then liquidated and distributed to the owner or owners. This transaction is tax-free provided that the LLC does not have more liabilities than assets.
After designated corporate status, the LLC can elect S status if its members are allowed to hold stock. The LLC owner must file IRS Form 8332, Entity Classification Election, unless he or she has already properly filed Form 2553 in a timely manner. This must occur no more than 75 days before and fewer than 12 months after the date of filing for corporate taxation status, and the status change can be retroactive for up to 75 days.
S corporation rules require a new corporation to elect S corp status within three months of the corporation activation date, by the 15th day of the month. This is also the earliest date on which the new S corp can conduct business, acquire assets, or have shareholders. An LLC that wants to elect S corp status should follow these guidelines:
- File ONLY Form 2553 if you want to become an S corporation and elect corporate taxation treatment on the same date. This form should be filed based on official S corp guidelines.
- Attach a statement indicating that you are electing to be taxed as a corporation under Section 301.7701-3(c)(1)(v)(C).
- The form should be filed by either 75 days or 2 months and 15 days after the S election is effective, whichever is earlier. This allows you to confirm to both filing limits.
- You don't have to file on the first day of the calendar year. You can make a midyear election but should not do so before you conduct business or acquire assets and members.
- Use section F to determine whether your business year will be a calendar year or a 52- or 53-week year that ends in December. You can also calculate your tax year based on the date you became the LLC owner or the date you began conducting business.
- After filing Form 2553, you'll be classified as a corporation as of the date your S corp becomes effective.
- You cannot change your classification again within 60 months without IRS permission.
When electing S status for your LLC, the business's operating agreement and other legal documents must follow S corp guidelines. This means that all documents treating the LLC as a partnership must be replaced or amended.
An S corporation is often the best election for LLCs that are very active and/or subject to high payroll taxes. This structure allows you to enjoy the tax treatment of a corporation with the administrative benefits of an LLC, including fewer forms, filings, meetings, and record-keeping requirements and lower costs.
From a tax standpoint, your LLC exists separately from you as an individual. This means the LLC can pay you a salary, which is subject to FICA and other withholdings. Additional income can then be distributed as passive dividends, which are not taxed as payroll. This allows you to choose the most advantageous individual and business tax situations.
Before the submission of Form 2553, all LLC members must consent to this categorization.
Relief for Missed S Corporation Elections
If an LLC owner misses the deadline for S corporation election, he or she can apply for relief under Rev. Proc. 2013-30 without charge.
Potential One-Class-of-Stock Issues
An LLC cannot elect S corp treatment if it allows pass-through of income or loss to members in its operating agreement. That's because this would constitute multiple classes of stock. In an S corporation, all outstanding shares of stock must carry identical distribution and liquidation rights regardless of voting rights. Allocations that are not based solely on ownership percentage are not allowed by S corp guidelines.
If you need help with electing S corporation status as an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.