LLC Filing as S Corp: Everything You Need to Know
LLC filing as S corp refers to when a business owner sets up an LLC and decides to have the LLC treated as an S corporation.3 min read
2. Taxing LLC as an S Corp
What Is LLC Filing as S Corp?
LLC filing as S corp refers to when a business owner sets up an LLC and decides to have the LLC treated as an S corporation. This combines two popular business structures, allowing a business owner to enjoy the advantages of both.
Taxing LLC as an S Corp
S corporation election for your LLC may be a good choice if your LLC operates an active business or trade and the payroll taxes or SECA taxes on the sole owner or owners are high.
A similarity between LLCs and S corporations is that both "pass-through" income to the owners. Another similarity is that both business structures offer limited liability protection to the owners. A business owner can elect S corporation status for their LLC by filling out the IRS Form 2553 for the IRS.
Even though your enterprise will be treated as an S corporation, it will be considered an LLC from a legal standpoint. Therefore, you will enjoy advantages like lower start-up costs, fewer forms and filings, fewer recordkeeping requirements, and fewer formal meetings.
Your enterprise will be viewed as an S corporation from a tax perspective. This will allow you to avoid double taxation and enjoy pass-through income as if your LLC was a partnership or proprietorship.
Essentially, taxing an LLC as an S corporation means that you will enjoy the benefits of the IRS treating your corporation as a corporation without having to deal with the administrative hassles. In the eyes of the IRS, your business will be independent and separate from you.
The LLC can pay salaries and wages to all the owners. The amount paid to the owners will be subject to withholding requirements like the FICA tax. The remaining net earnings can be distributed to all the owners of the LLC as passive dividend income. This income won't be subjected to SECA tax.
An LLC being treated as an S corporation for tax purposes may offer opportunities for tax planning to reduce your business's overall tax liability. Your LLC may also be able to enjoy better tax treatment for some fringe benefits as well.
LLCs can also choose to be treated as a C corporation for tax purposes rather than as an S corporation. Business owners can elect for their LLC to be treated as a C corporation by filing a document, which is called "Election with the IRS."
LLCs are only allowed to have S corporation status if they meet the following requirements:
- The entity possesses a maximum of 100 shareholders,
- None of the shareholders of the LLC are nonresident aliens, or noncitizens who don't have residency in the United States,
- The LLC possesses just one class of stock. There cannot be preferred stock giving special rights to certain shareholders, and
- None of the shareholders of the entity have other partnerships or corporations
In some cases, business founders have state-law reasons for wishing to form their business as a limited liability company. However, when it comes to taxes, these business founders would prefer S corporation treatment. For example, S corporation status might be ideal because one of the partners is dealing with self-employment tax on their distributive share of the business income. However, the owner of the S corporation may not be subject to self-employment tax on their distributions from the entity or their pass-through income.
An LLC must do the following if it is elected as an S corporation:
- Transfer all liabilities and assets to the corporation in exchange for stock, and
- Distribute stock to the LLC's owners for liquidation.
This transfer to the corporation is free from taxes as long as Sec. 351(a) applies and the liabilities of the LLC do not exceed the assets of the LLC.
If the members are able to hold S corporation stock, the LLC will be able to assume S corporation status.
Normally, LLCs file election to be taxed as a C or S corporation on Form 8832, which is called Entity Classification Election. Under Regs. Sec. 301.7701-3(c), the effective date for the election of classification needs to be within 75 days of the date when election was filed. The effective date cannot be more than a year after the date when the election was filed.
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