LLC Tax Status: Everything You Need to Know
The LLC tax status your company has may be set by default or may be elected by you for tax purposes. In general, the IRS taxes single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. 3 min read
2. Changing Your Tax Status to a C Corporation or S Corporation
3. C Corp Status
4. S Corp Status
The LLC tax status your company has may be set by default or may be elected by you for tax purposes. In general, the IRS taxes single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. You may choose to be taxed as a corporation if you find it more beneficial.
LLC Tax Options
By default, the IRS taxes new LLCs the same as sole proprietorships or partnerships, based on whether they have one owner — or member — or multiple members. The business doesn't pay taxes; instead, the members pay taxes on their share of the profits and file individual tax returns.
In a single-member LLC, the owner files his or her own return and includes Schedule C, which reports the LLC's profits and losses. The member is also responsible for self-employment taxes, which includes Medicare and Social Security.
Multi-member LLCs file an information return on Form 1065, which details the business's profits and losses. Each partner includes a Schedule K-1 on his or her personal tax return, detailing his or her share of the company's profits and losses.
Changing Your Tax Status to a C Corporation or S Corporation
Some LLC members may find it beneficial to be taxed like a C corporation or an S corporation. If you decide to make the change, your LLC retains its legal status, so your business is treated like an LLC in all ways except for taxation.
C Corp Status
- In the first section, you'll determine your company's eligibility to make this change.
- In the next section, you'll choose your current entity type and the type you wish to change to. The terms “domestic” and “foreign” don't apply to a country; they apply to the state where your business is located. Therefore, a domestic company is in the same state you originally registered and a foreign company is in another state you're registered to do business.
- The final section contains a consent statement. You'll provide member signatures.
This is quite a complicated form, so it's recommended that you receive advice and assistance from an attorney when completing it.
S Corp Status
You might also elect to be taxed as an S corp. To elect S corp status, you'll file form 2553 with the IRS. You must make the election within 75 days of your LLC formation or within 75 days after the start of your tax year. Otherwise, the election will take effect the following year.
Following are the eligibility requirements for S corp status:
- Your LLC must be a domestic company.
- Your LLC can have no more than 100 shareholders.
- Your shareholders must be individuals (U.S. citizens or resident aliens) and certain trusts or estates.
- You must have an approved fiscal year end.
Both LLCs and S corps are pass-through entities, which means that business profits (and losses) pass through the company to the members. However, S corps can do some forms of tax planning that LLCs can't.
Members may work as employees in the company and earn a salary. Other earnings that members receive are considered dividend income.
Two benefits that S corps provide include the following:
- They don't have the double taxation that C corps do.
- They create a legal separation between the business and the members. When members work as employees in the company, they're subject to payroll withholding. By not having to pay self-employment taxes all on their own, they may relieve some of their tax burden.
Even if you elect S corp status for tax purposes, your business is still legally an LLC. You have fewer complexities and formalities than a C corp. You also have more flexibility in your company's structure.
Many business owners who choose a different tax status than their default one often do so to gain certain benefits, such as tax savings or increased investment opportunities. You can always consult with tax and legal professionals to help you make the best decision for your company, now and in the future.
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