Single Member LLC S Corp: Here's What You Need to Know
A single member LLC S Corp happens when the owner of an SMLLC elects to have their company treated as a corporation for tax purposes.3 min read
2. LLC Offers Limited Liability and Flexibility
3. Electing S Corporation Tax Status for a Single-Member LLC
A single member LLC S Corp happens when the owner of an SMLLC elects to have their company treated as a corporation for tax purposes. While this affects the requirements for tax payment, it does not affect limited liability.
LLC Electing S Corp Status: The Best of Both Worlds
The debate over the superiority of the S Corp or the LLC is one that's common among attorneys and business owners alike. Thankfully, you don't need to choose. You can set your business up as an LLC and then have it treated like an S corporation for tax purposes. Payroll taxes for LLCs can be very high on their owners. S corporation election can help reduce this burden.
LLCs and S corporations both pass their profits directly through to owners. They each provide their own form of liability protection. There are some differences to consider when you are deciding between the two structures:
- LLCs are much easier to operate and administer.
- LLCs offer more flexibility in terms of allocating profit percentages to owners.
- S corporations offer better options for how profits are distributed. They can be paid as salaries to the owners, or they can be given as profit distributions.
- S corporations provide more options for tax planning and reduction.
Think about the features that are most characteristic and critical to your business before deciding on becoming an LLC, S Corp, or a hybrid of the two.
LLC Offers Limited Liability and Flexibility
LLCs are governed by state laws. They are designed to be agile like general partnerships or sole proprietorships, but also protective in terms of their limited liability clauses. Unless the LLC decides to be taxed as an S corporation, all of its profits pass through to the owners as income. Then, the members of the LLC report their own profits from the business on their personal tax returns. Thus, they can avoid the double taxation that corporations are subjected to. At the same time, members benefit from limited liability, much like corporation owners do. An LLC member's liability or risk is limited to the amount of capital they invest in the business. Here are the key features of an LLC:
- Owners benefit from limited liability
- Fewer requirements for filings, records, meetings, and forms make them easy to use
- Members can distribute profits how they like, rather than based on the original percentages of capital contribution
- Income passes through to owners and avoids double taxation, unless S corporation taxation is chosen
- Income, which is treated as self-employment income, is taxed at a 15.3 percent rate to pay Social Security and Medicare taxes
An LLC is not considered a taxpayer by the IRS. Tax payment is a separate issue from limited liability. No matter how the LLC chooses to pay its taxes, its members are still granted the same limited liability protections.
Electing S Corporation Tax Status for a Single-Member LLC
If you choose to keep the default status of your LLC is treated as a disregarded entity, you can report income on Form 1040, Schedule C of your personal tax return. You can also choose to have the business taxed as a C corporation or an S corporation. An S corporation is a small-scale form of corporation.
Although you benefit from limited liability, you are taxed as a sole proprietorship when you are an SMLLC. All profits or losses pass through into your own income bucket.
If you wish to be taxed as an S corporation instead, be sure to fill out Form 2553, which certifies your election to be treated as an S Corp. This election may be made at any time once you set up your LLC with the state. Your status can be changed to S Corp any time in the period of 75 days before you file the form, up to a year after you file the form.
If you are taxed as an S corporation, you will need to file the additional Form 1120, which is your corporate tax return. Schedule K-1 is used for calculating S corporation taxes, and the same information should be reported in Schedule E of your personal tax return.
If you need help with deciding between the single member LLC or S Corp structures, 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.