LLC Filed as S Corp: Everything You Need to Know
An LLC filed as S Corp is when a Limited Liability Company elects S Corporation taxation status with the Internal Revenue Service (IRS).3 min read updated on February 01, 2023
What Is an LLC?
As a type of business structure, an LLC provides liability protection for the owners, who are called members, of the business just like a corporation structure would provide to its shareholders. LLCs also benefit from the taxation treatment and organizational freedom of a partnership or sole proprietorship.
Unless an LLC opts to be viewed as a corporation in the eyes of the IRS it will be treated as a pass-through business entity, meaning that the revenue of the company passes through to the members.
All pass-through business entities, like proprietorships and partnerships, are required to have the profits of the business reported on the personal income tax returns of the LLC members. Corporations face taxes on the business income, and the shareholders also must report any income distribution on their tax returns, so the profits of the company are taxed twice.
As a Limited Liability Company, the liability of the members of an LLC is limited to their specific investment amount in the company. If the business were to go under or face legal issues, the members could not be held responsible for anything greater than the amount they invested, and their personal assets are protected. This protection is not afforded to owners of proprietorships and partnerships. If a partnership fails, the partners are held personally responsible for all of the business's debts.
- Liability protection for members
- Pass-through profits to members
- Avoidance of double taxation (unless the LLC chooses corporation tax status)
- Fewer filing requirements and costs with the state
- Fewer requirements for organization, record-keeping, and profit distribution (doesn't have to reflect member's initial buy-ins)
- All profits passed through to members are subject to self-employment taxes
- Not recognized by the IRS as an official classification for federal taxation
LLCs can choose from three different tax classifications while maintaining liability protection for its members. These options are:
- Sole proprietorship (disregarded entity)
Unless the LLC elects corporation status by submitting Form 8832, a single-member LLC is automatically classified as a sole proprietorship and a multi-member LLC as a partnership. If an LLC chooses corporation status, they can submit Form 2553 to elect status as an S Corporation if they meet the necessary requirements.
What Is an S Corp?
S Corps or S Corporations are a type of corporation treated as pass-through entities even though they are technically corporations, so the income of the corporation, as well as its losses, are passed through to the shareholders (members or owners of a corporation) and reported on their personal tax returns. S Corps are not taxed as their own entity, so they avoid double taxation like partnerships do.
Any corporation that wants to opt for S Corp status must meet the following requirements:
- The corporation must be based in the United States
- The corporation's shareholder number cannot exceed 100 (keep in mind that family members, including spouses, are counted as only one shareholder)
- Other entities may not act as shareholders for an S Corp
- All shareholders must be residents and individuals (some trusts and estates can have ownership in an S Corp)
- There can be one class of stock in the corporation, but that single class may be split into voting and non-voting types
S Corps are appealing to many business owners because they limit taxation on the profits of the company. As a corporation, the income paid to owners and employees is the only income that's eligible for Social Security and Medicare taxes.
The pass-through income earned by the shareholders is classified as dividend income and therefore is not subject to self-employment taxes. These features allow for additional planning with taxation that's not possible with a basic LLC.
S Corp status is attractive to many LLC members. These are an S Corp's most notable features:
- Liability protection for members (continued when LLC elects S Corp status)
- Pass-through income characteristic
- More requirements than a typical LLC (more required reporting, meetings, and record keeping)
- No freedom for profit distribution amounts (shareholders must receive amounts in accordance with their capital contributions
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