LLC File Taxes as S Corp: Everything You Need to Know
An LLC may file taxes as S corp by completing and filing Form 2553, Election by a Small Business Corporation.4 min read updated on February 01, 2023
What Is an LLC?
An LLC may file taxes as S corp by completing and filing Form 2553, Election by a Small Business Corporation. When these LLCs meet the criteria for filing as an S corp, they can file taxes as an S corp. However, they are legally still LLCs.
An LLC, or limited liability company, is a business formed under the tenets of state law. Although an LLC has most of the rights and advantages of a corporation, it is easier to set up and manage this type of legal entity. LLCs that have more than one owner are taxed as partnerships, while one-owner LLCs are subject to the same tax laws as sole proprietors and must file Schedule C on their individual tax return. For multiple-member LLCs, each partner must file Form 1065 along with Schedule K-1. The LLC itself is not taxed by the IRS.
Because of these tax benefits, similar to those of S corporations, an LLC is a preferred way to structure a small business by both business owners and accountants. An LLC is also much simpler to administer than an S corporation, in which profits and losses are passed through to shareholders. The LLC structure allows owners to flexibly divide allocation of profit and loss, with taxation assessed accordingly.
While all profits and losses are directly passed to the LLC owners for tax purposes, personal liability of LLC members is limited to their individual investment in the partnership. This distinguishes an LLC from a general partnership or sole proprietorship; with these structures, all owners are responsible for business debts.
The most notable features of an LLC include:
- Limited owner liability
- The avoidance of double taxation
- Streamlined operation, with reduced paperwork, filings, start-up expenses, required formal meetings, and record-keeping obligations
- Few restrictions on profit-sharing
- Eligibility for self-employment income taxation levels
LLC members are still protected from liability even when they opt to be treated as a corporation for tax purposes.
Taxing an LLC as a Corporation
LLC owners can file an IRS document known as an election if they want to be taxed as a C or an S corporation. To be treated as an S corporation by the IRS, an LLC must complete and file Form 2553. An LLC is eligible to receive S corporation status from the IRS only if:
- It has fewer than 100 shareholders
- No shareholders are considered nonresident aliens
- It offers only one class of stock
- No shareholders are corporations or other partnerships
Businesses typically file in the way that most greatly reduces their tax burden. When your LLC is taxed as a corporation, you don't have to claim the business income on your personal return. However, this strategy requires owners to pay both income taxes on the company's profits and on business dividend income they receive. A CPA or tax attorney can help you explore the various tax scenarios and determine which is most advantageous for your LLC.
After your corporate status is effective, the IRS considers all assets and liabilities of your previous LLC or sole proprietorship as transferred into corporate stock. However, your legal status as an LLC does not change. Although you'll need to meet the tax eligibility requirements for S corporations, you'll retain the advantages of LLC status. These include reduced costs and fewer required state fillings.
An S corporation is often the best choice if your LLC is actively engaged in the marketplace and faces substantial payroll taxes. Your LLC will not technically be a corporation, but will be treated as a separate, independent entity from the owner for taxation purposes.
What Is an S Corporation?
An S corporation is a tax structure where income and loss "passes through" the corporation and is reported on the personal tax returns of the business partners. Like partnerships, S corporations report their income and deductions. These are reported on Form 1120S, an information return, along with the profits and tax credits for the year. Each shareholder must be given a Schedule K-1, which lists their shares of each item reported on the 1120S. S corporation shareholders then file their personal Form 1040 along with Schedule E, which indicates the profits and losses outlined on Schedule K-1.
S corporations and partnerships treat their owners differently when it comes to employment status. In an S corporation, if an owner also does work for the company, he or she is also considered an employee. This means he or she must receive a reasonable salary for the services performed.
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