LLC Tax as S Corp: Everything You Need to Know
Having your LLC taxed as an S corp provides numerous benefits. By seeking corporate election, your LLC can avoid double taxation while minimizing tax liability. 3 min read
Having your LLC taxed as an S corp provides numerous benefits. By seeking corporate election, your LLC can avoid double taxation while minimizing tax liability. Your company will still operate as an LLC but will be treated as a corporation for tax purposes. Because there is no tax classification for LLCs, these entities are treated as sole proprietorships or partnerships by default. However, an LLC can also be taxed as an S corporation.
Electing LLC As an S Corp
Many business owners often wonder which option is best for tax purposes — an LLC or an S corporation. But you do not need to choose. You can set up your company as an LLC and then seek S corporation election. If you currently operate an LLC and your payroll taxes are high, S corporation election may be an ideal solution.
To be treated as a corporation for tax purposes, you need to file Form 8832 and Form 2553 with the IRS. Since setting up an LLC is fairly straightforward, this option gives you the best of both worlds. You will be able to take advantage of the LLC's ease of administration and the tax benefits of an S corporation.
However, it is important to note that S corporation is only allowed if:
- Your LLC has no more than 100 shareholders
- None of the shareholders are nonresident aliens
- Your LLC has only one class of stock
- None of the shareholders are other partnerships or corporations
Please note that election can only take effect withing 75 days prior and up to 12 months after you have filed for election. Once you change the status of your LLC, the legal status of your company will remain the same. This means that you will still function as an LLC but will prepare your taxes as an S corp.
Benefits of Electing the LLC As an S Corporation
When it comes to the legal obligations of your business, your enterprise will be treated as an LLC rather than as a corporation. This offers a number of benefits including ease of administration, fewer forms, lower start-up costs, fewer formal meetings, and more. But being taxed as an S corporation, your LLC will enjoy pass-through taxation like partnerships or sole proprietorships.
Though you won't have to deal with the administrative hassles associated with a corporation, you will be treated as one for tax purposes. In the eyes of the IRS, you and your business are separate from one another. This means that you will benefit from the opportunities that minimize your company's overall tax liability.
If your LLC's net income is high, then you should consider being taxed as a corporation. This way you won't have to report all of your business income on your personal tax return. Because the highest personal tax rate is higher than the highest corporate rate, your taxes will be significantly lower.
LLC and S Corp Similarities and Differences
Owners of an LLC or S corp benefit from pass-through income and limited liability protection. LLC provides greater ease of administration and operation. An S corp offers greater flexibility in regards to methods of income payout to its owners, which can take form of wages, salaries, or distributions. An S corporation also trumps an LLC for tax planning purposes.
For example, before you seek corporate election, your LLC's entire net income will be taxed at 15.3 percent towards Social Security and Medicare. But when you are considered an S corporation for tax purposes, you will only pay self-employment tax on the salary that you receive. The remaining profits are not subject to self-employment tax and are distributed among shareholders.
Once you have considered both options, you can discuss the details with your attorney. When first seeking S corporation election, due diligence can ensure that there are fewer complications down the road. This is particularly important for companies with multiple owners and shareholders.
If you would like your LLC taxed as an S corp, you can post your legal need 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.