Key Takeaways

  • An LLC can elect to be taxed as a corporation, either a C corporation or an S corporation.
  • Electing S corporation status can help LLC owners reduce self-employment taxes and retain pass-through taxation.
  • Filing Form 8832 is necessary for C corporation taxation; Form 2553 is required for S corporation taxation.
  • The election impacts only tax treatment, not the LLC’s legal status.
  • There are benefits and drawbacks to electing corporate taxation, and professional advice is critical before making a decision.

Having your LLC tax as corporation can be a good decision, particularly if you elect S corporation taxation. 

Should You Elect LLC Corporate Taxation?

When you form your LLC, you can make the decision to be taxed as a corporation. Before you make this decision, however, it's a good idea to learn why it's common for LLCs to elect corporate tax status.

In almost every case, a business will choose a tax status that will allow them to pay the lowest taxes possible. Partnerships and sole proprietorships are subject to the personal tax rate, which is at the higher end of the tax scale. In fact, the personal tax rate is higher than the personal tax rate. Choosing to have your LLC taxed as a corporation means your business income won't be included in your personal taxes.

Imagine that the net profit for your LLC in one year is $50,000. If you are operating a single-member LLC, then you would need to report the whole of this profit on your personal return. On the other hand, if you have your LLC taxed as a corporation, you can keep some of the profits in your business, meaning you would not need to pay personal income tax on this property.

With an LLC, the members of your LLC will be subject to double taxation, which is a big benefit of this business structure. However, choosing to have your LLC taxed as a traditional corporation means you will be subject to double taxation. Because of this double taxation issue, you should make sure the reduced take-home rate that comes with the corporate election will make up for the double taxes. You should make sure to consult with a tax professional before choosing corporate status. 

Pros and Cons of LLC Corporate Taxation

Electing for your LLC to be taxed as a corporation can offer substantial benefits, but it also comes with potential risks. Benefits include:

  • Potential tax savings by retaining earnings within the business at the corporate tax rate.
  • Enhanced credibility with investors and financial institutions.
  • Limited liability protection remains intact.

However, drawbacks include:

  • Possible double taxation for C corporation elections (business profits taxed at both corporate and shareholder levels).
  • Increased administrative requirements, such as separate corporate tax filings and payroll obligations for owners.
  • Restrictions on who can be shareholders if you choose S corporation status (e.g., no foreign owners or certain trusts)​.

Evaluating these pros and cons carefully — preferably with professional guidance — is essential before making the election.

Electing Corporate Taxation

There are several important pieces of information you should understand if you're thinking about electing corporate tax status for your LLC:

  1. You will need to submit Form 8832 to the IRS to make your election.
  2. Only eligible entities, including LLCs, are allowed to make this election.
  3. You will be electing to be treated as an association, which is an entity that can be taxed as a corporation.
  4. Form 8832 requires a signature either by all the members of your LLC or a single member. If you choose to have a single member sign, you should have a company meeting to make sure that all members agree to corporate taxation.
  5. When making your election, you need to list the names of all LLC members. If you are electing this status for a single-member LLC, you need to include the owner's Social Security number. For multi-member LLCs, include the company's employer identification number.

Your LLC's legal status will be unchanged when choosing to be taxed as an S corporation or corporation. This means the only thing that will be different about your company is your tax treatment. 

How to Elect S Corporation Taxation

If you prefer pass-through taxation but still want to minimize self-employment taxes, electing S corporation status may be a better option than C corporation status. Here’s how:

  • First, you must file Form 2553, Election by a Small Business Corporation, with the IRS​.
  • Your LLC must meet certain eligibility criteria, such as having no more than 100 shareholders and only one class of stock​.
  • S corporation election allows the LLC to split income between salary (subject to employment taxes) and distributions (potentially avoiding additional self-employment taxes)​.
  • Timeliness is critical — generally, Form 2553 must be filed no later than two months and 15 days after the beginning of the tax year when the election is to take effect.

It's crucial to correctly calculate reasonable compensation for members actively working in the business, as the IRS scrutinizes this during audits.

C Corporation Taxes

Traditional corporations are known as C corporations. By default, your entity will be a C corporation after you have filed your Articles of Organization. The legal structure of C corporations provides a variety of benefits:

  • Separating business and personal finances.
  • Protecting company owner's assets from lawsuits.
  • Allowing the company to raise capital by selling company shares.

When corporate officers are paid, these payments count as wages, subjecting withholdings for Medicare and Social Security to the 7.65 percent FICA tax. The biggest drawback of corporations is that they are subject to double taxation.

Corporations are legal entities that have the ability to earn income. The federal government, as well as the District of Columbia and forty-seven states, taxes income earned by corporations. In addition to this corporate tax, owners of the company must pay personal income tax on their wages. While there are several tax deductions that are available to corporations, these deductions usually won't make up for the double taxation.

Fortunately, smaller companies can choose to be taxed as an S corporation to prevent double taxes. 

Double Taxation Explained

One of the main drawbacks of C corporation taxation is double taxation:

  • The corporation pays income tax on its profits.
  • Shareholders then pay personal income tax on any dividends they receive. While the corporate tax rate is currently a flat 21% federally, adding shareholder taxes can significantly increase the overall tax burden​. For some businesses, particularly those planning to retain and reinvest profits rather than distribute dividends, C corporation status can still offer net benefits despite the double taxation issue.

S Corporation Taxes

S corporations are normal companies that choose to be taxed under Subchapter S of the IRS Code. Instead of being taxed as a traditional corporation, S corporations are treated as pass-through entities, meaning losses and profits are reported on the owner's personal returns.

Common Pitfalls When Electing S Corporation Status

While electing S corporation status can reduce overall taxes for LLC owners, it’s not always the right choice. Potential pitfalls include:

  • Eligibility Missteps: Failure to meet or maintain eligibility requirements (such as exceeding 100 shareholders or allowing an ineligible shareholder) can cause automatic revocation of S corporation status​​.
  • Unreasonable Salary Issues: Members must pay themselves a "reasonable salary" for services rendered before taking dividends. Setting salaries too low can trigger IRS audits and penalties​.
  • State-Level Tax Treatment: Not all states recognize S corporation status. Some states treat S corporations the same as C corporations for tax purposes, negating federal tax benefits​.
  • Administrative Complexity: S corporations require more stringent recordkeeping, formalities like issuing stock, and corporate resolutions than typical LLCs​.

Because of these risks, it’s critical to consult a tax professional or legal advisor to determine if S corporation election is the right fit for your business model and growth plans.

Frequently Asked Questions

  • Can any LLC elect to be taxed as a corporation?

    No. While most LLCs can elect to be taxed as either a C corporation or S corporation, S corporation elections have specific eligibility rules regarding the number and type of shareholders.

  • What IRS forms are required for an LLC taxed as a corporation?

    Form 8832 is used to elect C corporation taxation. Form 2553 is used to elect S corporation taxation.

  • Will my LLC’s legal status change if I elect corporate taxation?

    No. Electing to be taxed as a corporation only changes your LLC’s federal tax treatment; it does not alter its legal structure or limited liability protection.

  • Is double taxation always a disadvantage for C corporations?

    Not necessarily. Double taxation can be a disadvantage when profits are distributed as dividends, but if profits are reinvested, the overall tax burden can be lower compared to individual tax rates.

  • When should I file for S corporation election?

    You must file Form 2553 no later than two months and 15 days after the start of the tax year when you want the S corporation status to be effective.

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