LLC S Corporation: Everything You Need to Know
An LLC S corporation, or a limited liability company Subchapter S corporation, is a limited liability company that has chosen to be taxed under Subchapter S of the IRS Internal Revenue Code. 3 min read
2. LLC vs. S Corporation
3. Why Make Your LLC Into an LLC S Corporation
LLC S Corporation
An LLC S corporation, or a limited liability company Subchapter S corporation, is a limited liability company that has chosen to be taxed under Subchapter S of the IRS Internal Revenue Code. Thus, an S corporation is not a type of business entity but a type of tax designation.
The business entity is still an LLC, which is a business that has a separate legal designation from its owners in order to confer on them limited liability from business-related debts and lawsuits. LLCs also offer greater management flexibility and fewer recordkeeping obligations than true corporations do. LLC S corporations are pursued mainly for tax benefits, but there are other benefits, as well.
LLC vs. S Corporation
Unsurprisingly, LLCs and LLC S corporations are similar in many ways, but there are also some important differences between them. These include:
- Ownership and formality differences.
- LLC S corporations can have no more than 100 shareholders; LLCs have no limit.
- LLC S corporation owners must be U.S. citizens or residents; LLCs have no such restrictions.
- LLC S corporations may not have unrestricted subsidiaries; LLCs may.
- LLC S corporations have more internal formalities. They must adopt bylaws, issue stock, hold initial and annual shareholder and director meetings, and keep their meeting minutes together with their corporate records.
- LLCs have no such internal formality requirements. They may, but do not have to, adopt an operating agreement, issue membership shares, and hold document member meetings and major company decisions.
- Management differences.
- LLCs can be member managed or manager managed. Member management makes the LLC operate similarly to a partnership. Manager management is more like a corporation in that members forgo day-to-day business decisions.
- LLC S corporations are managed by officers and directors. A board of directors handles major decisions and corporate issues while designating officers to handle day-to-day business decisions.
- Existence differences.
- LLC S corporations have no dissolution date; LLCs must list this in some states.
- Some events, like the withdrawal or death of a member, can bring an end to an LLC.
- Ownership transfer differences.
- LLC S corporations can transfer their stock freely if IRS ownership restrictions are complied with.
- LLCs usually cannot freely transfer their stock without membership approval.
Self-employment tax differences.
- LLCs S corporations have better self-employment tax rates than LLCs.
- LLC S corporation owners are considered employees, and FICA taxes are paid on their salary amount.
- In LLC S corporations, the corporate earnings after owner salary payment can possibly be considered unearned income not subject to self-employment tax.
- An accountant or tax advisor should be contacted to see how taxes apply to your situation.
Why Make Your LLC Into an LLC S Corporation
The most common reasons for turning an LLC into an LLC S corporation are to keep some of your LLC’s profits in the company and to benefit from tax breaks. As an S corporation, your LLC will benefit from pass-through income, corporate tax breaks, and not having to deal with double taxation. In this situation, LLC members can claim losses and profits on their personal tax return, much like a partnership.
However, not all LLCs can elect S corporation status. For single-member LLCs, non-qualifiers include:
- Being a foreign LLC.
- Being owned by a non-U.S. resident.
- Being structured in such a way that the owner is a partnership or corporation.
Before you decide to change your LLC to an LLC S corporation, you should figure out if you will save money by doing so.
To do this, decide what a reasonable salary for someone in your position would be (keeping in mind that the IRS watches for abnormally low owner-shareholder salaries), then ask yourself if your business would have any profit after that salary was paid. If so, then an S corporation may be good for you.
That said, you should also consider that an LLC S corporation will require a more complicated tax return, and if your LLC has no employees beyond you, tax withholding will have to be set up. For best results regarding your tax situation, you may want to seek the advice of an accountant.
Additionally, if you need help understanding LLC S corporation, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.