LLC Filing As An S Corp: Everything You Need to Know
An LLC filing as an S-corp will be taxed differently than other LLCs. By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships.3 min read
An LLC filing as an S-corp will be taxed differently than other LLCs. By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. However, an LLC can elect to be taxed as an S-corporation instead by filing Form 8832 with the IRS.
An LLC, or limited liability company, is formed legally under state law in order for a business to operate. It's easy to form and run an LLC, and there are several advantages of a corporation that businesses can enjoy, such as having limited liability. An LLC is set up to give a corporation limited liability features, such as being flexible in how it operates and having tax efficiencies.
Any losses or profits of the LLC go through the LLC to its owners, who are also known as members. Every member will report their profits and losses on their federal tax return. The same goes for a partnership or proprietorship. This setup helps business owners avoid getting taxed twice.
If an LLC is formed by a single member, it will be a disregarded entity. This means the individual will pay income tax as the sole proprietor on their personal tax return. A multiple-member LLC will pay income taxes in the form of a partnership. A member's personal liability will be limited to his or her investment in the limited liability company. This is different from the LLC as a general partnership or sole proprietorship, where every owner will be subject to liability for the business' debts.
The most important features of an LLC include the following:
- Income passes through to owners, which prevents double taxation (unless corporate treatment is chosen).
- There will be fewer meetings that are formal, fewer costs to start the company, fewer forms and filings, and fewer record-keeping requirements.
- Owners have limited liability.
- All net earnings of the LLC go to owners through self-employment income..
LLCs are not identified by the IRS as a taxpayer classification when it comes to federal tax purposes. Federal tax treatment is distinct from the limited liability, so members will be protected from liability whether they're a corporation, partnership, or sole proprietorship. LLCs that have one owner will be taxed as sole proprietorships. By default, LLCs with multiple owners will be taxed as partnerships. An LLC can decide to be taxed as an S-corporation or a C-corporation by filing an election with the IRS.
When the filing is complete, the LLC will be considered the same as a corporation according to the IRS. It will file the appropriate tax forms for that kind of entity. Many LLCs will decide to keep their default form of taxation. However, there are tax advantages for being taxed as an S-corporation. The tax advantage is due to the recently created pass-through tax deduction which was established by Tax Cuts and Jobs Act.
The LLC can choose to be treated as a company that's taxable as a corporation if they file Form 8832 (Entity Classification Election). After this is complete, Form 2553 (Election by a Small Business Corporation) needs to be filled out to choose to be taxed as an S-corporation. The LLC's legal status will stay the same even if the tax status is changed to an S-corporation or a corporation. This means the business can function as a normal LLC, but its taxes will be different.
LLCs vs S-Corporations
Business owners can benefit by forming an LLC and then choosing to be an S-corporation when it comes to tax purposes. An S-corporation election is a good choice for business owners if the LLC operates an active business or trade. This is also a good option if payroll taxes on the owners are particularly high. Both organizations will have their income passed through to the owners and give them limited liability protection.
An LLC has advantages over an S-corporation due to the ease of administration and operation. There's also flexibility when it comes to deciding what percentage of profits and losses each owner will receive. However, an S-corporation has an advantage over a regular LLC in that there is more flexibility when it comes to allocating the company's earnings to the owners through the form of either distributions or wages and salaries.
If you need help with your LLC filing as an S-corp, you can post your job 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, Menlo Ventures, and Airbnb.