Single-Member LLC Taxed as an S Corp: Everything You Need to Know
When a single-member LLC is taxed as an S corp, the owner has decided to seek S corporation status and will enjoy certain benefits in terms of taxation.3 min read
When a single-member LLC is taxed as an S corporation, that means that a business owner has decided to seek S corporation status. Although the LLC still operates as a limited liability company, the owner will enjoy certain benefits in terms of taxation. One of the most obvious benefits is the ability to avoid self-employment taxes, helping the company grow.
What Is a Single-Member LLC?
When you form a single-member LLC, you will be considered a "disregarded entity." This means that although you will enjoy limited liability protection, you will be taxed as a sole proprietor. However, you do have a choice when it comes to how you want to be taxed.
If you take no further action, you will be taxed as a sole proprietorship. If you seek corporate election, however, you will be taxed as an S corporation. As an LLC owner, you can make this choice in the future. For example, if your company grows over the years, your choice of tax classification may no longer make sense.
Electing S Corp Tax Status for a Single-Member LLC
If you are wondering why you would consider electing S corporation status, the most common reason would be to avoid self-employment taxes on the profits that your LLC makes. Once you do make an S corp election, you will then be able to pay yourself a reasonable salary. The remaining profits will be distributions, which are not subject to self-employment taxes.
In order to take this beneficial step, you must first file IRS Form 2553. If you do change your tax classification, realize that you must wait 60 months to change it again. That is why many single-member LLCs wait until they are out of the startup phase to seek S corporation election. If changed too early, this can complicate accounting practices.
Also, once you elect S corporation tax status, be aware that you will need to file additional forms each year, including Form 1120S. To better understand what will be expected of you, please visit www.irs.gov or consult with a professional.
LLC With S Corp Status: Best of Both Worlds
If you're trying to decide which is better for your business, an LLC or an S corporation, you should know that this topic is often debated — even among accountants and attorneys. But it is not an either/or decision. Once you set up an LLC, you will continue to operate as one, even if you seek S corporation status for tax purposes.
If you are currently operating as an active business and your payroll taxes as an owner are high, S corporation election may be an ideal choice. To compare, here are some key differences between these two entities:
- An LLC is better than an S corporation because operation and administration are easier.
- An LLC also beats an S corporation in that percentage allocation among owners is more flexible.
- An S corporation trumps an LLC in that paying owners becomes more flexible.
- An S corporation is also more beneficial than an LLC for tax-planning purposes .
Before you decide which option is best for you, focus on the features that are most important for your business.
Advantage of Being Taxed as a Corporation
Typically, a business will choose the tax form that offers the lowest tax rates. For example, when you are taxed as a sole proprietorship, your income will be subject to high rates. This means that if your net income is very high, you may benefit from removing your LLC from your personal taxes.
This is where S corporation election comes into play, as this step helps you lessen the burden on your personal tax return. As you become more profitable, this decision could significantly improve your financial state in the long term.
Before you take this step, you should be aware of what this decision means for your business. To make the election, all you need to do is file Form 8832. It is a simple process, yet it could make a world of difference as your company grows. To help you better decide, you can either seek the advice of a professional or work out "what-if" scenarios.
If you need help understanding how your single-member LLC will be 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.