Yes. An LLC can be taxed as an S Corp, assuming it qualifies for S Corp taxation status. An LLC can also be taxed as a C Corporation.
An LLC is a very flexible business type because it can be taxed as a corporation or S corp.
Option 1: LLC electing to be treated as a Corporation
A. Single Owner LLC:
If the LLC has only one owner, the IRS will automatically treat the LLC as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832 Entity Classification Election).
B. LLC Owned by More than One Person:
If the LLC has two or more owners, the IRS will automatically treat the LLC as if it were a partnership unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832 Entity Classification Election).
Option 2: LLC electing to be treated as an S Corp
An LLC may elect S Corp tax treatment by filing IRS Form 2553 (Form 2553 Election by a Small Business Corporation). However, sometimes the LLC must file both Form 8832 (see Option 1 above) and Form 2553. To determine whether your LLC can file Form 2553 alone, or whether Form 8832 must also be filed, see page 1 of the Instructions to form 2553 or talk with a CPA or LLC attorney in your state.
Tips for an LLC Taxed as an S Corp:
Electing to have your LLC taxed as an S Corporation involves a couple procedural changes in paying and filing your taxes.
1. Quarterly Filings for an LLC Taxed as an S Corp
Keep in mind that if your business is treated as an S Corp, it must pay estimated taxes. But this inconvenience is often offset by the tax benefit of an S Corp (self-employment tax savings).
2. Income Taxes at the End of the Year
Also, an S Corp must file different income tax forms at the end of the year (Which Forms Must I File?).
Shareholder-employees will receive two tax documents from the S-Corporation at the end of the year: a W-2 wage statement (income as an employee) and a Schedule K-1 statement (income as an owner).
3. No Self-Employment Tax for an S Corp Owner-Employee
Shareholder-employees of an S-Corp (including an LLC taxed as an S Corp) do not pay Self-Employment Tax because their wages are reported on a W-2, with Social Security and Medicare taxes already withheld. By contrast, the owner of an LLC that is taxed as a partnership or sole proprietorship (not an S Corp) does pay Self-Employment Tax. Self-Employment Tax is figured at the end of the year on Schedule SE of IRS Form 1040.
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Dwayne:
These are great questions. I don’t know the answers without researching them. Meeting with a CPA regarding these questions is a great idea.
Aaron
Hi Aaron,
My question relates to the profit distribution of an LLC electing to be taxed as a S Corp. When doing that does the LLC organization allow the company to split profits as the LLC sees fit, rather than at the shareholder percentage holding rates, or does the S Corp taxation override that and profits must then be split according to shareholder percentages?
Thanks much for a great website!
Joe:
The S Corp rules override the flexibility offered by an LLC, so profits must be split according to shareholder percentages.
Aaron
Can a LLC choose to be taxed as a sub s and have a foreign member (Canadian)?
Stewart:
An LLC taxed as an S Corp must meet all the requirements of an S Corp.
Aaron
Aaron, If an election is made at the time of setting up an LLC to be treated as an S-Corp can 8832 be used to undo the election and return to the partnership status? More specifics if necessary include the fact that the LLC is owned by two married individuals and prior to the desired change in election the LLC has no assets. More specifically there was a change in desired election before starting any ‘business’.
Kirke:
Once the S corp election is made, it stays in effect until it is terminated or revoked. IRS consent generally is required for another election by the corporation (or a successor corporation) on Form 2553 for any tax year before the 5th tax year after the first tax year in which the termination or revocation took effect. See IRS Regulations section 1.1362-5 for details.
Aaron Hall
Aaron, As a follow-up to my previous question, you mentioned that the election remains in effect until it is terminated or revoked. Can revocation be made easily and voluntarily by the members of the LLC and if so what is the process / form that needs to be followed / filed. Hoping to avoid having to establish a new LLC and dissolve original one in order to correct the error in electing S-Corp status. Thanks.
Kirke:
The process for your LLC will depend on many factors. I would need to know a lot more about your LLC before I could advise you on this for your particular circumstances. I recommend you meet with an attorney to ensure this is done correctly (to avoid unintended tax consequences).
Aaron
Are multiple-member (other LLCs or LPs) owners of a newly-created LLC (NEWCO) subject to self employment tax on the net profits of NEWCO? If NEWCO’s profit is derived from interest income, is that treated as passive income and reported on each owner’s Schedule E or “active trade or business” and subject to Schedule SE?
Victor:
Great question. The answer depends on the source of the interest income and potentially other factors. This type of question should be discussed with a CPA.
Aaron
Can we form a general partnership and elect to be treated as an S corp for federal income tax purposes ?
Would this be the form 2553 ?
Michael:
No. A general partnership cannot elect to be taxed as an S Corp. Only corporations and LLCs can elect S Corp treatment.
Aaron
Does a LLC taxed as an S-corp have to issue shares to members?
Robert:
No. An LLC taxed as an S Corp does not need to issue shares. LLCs issue the equivalent of shares when LLCs issue to their members “units” or “interests,” such as a percentage of ownership interest in the LLC. These units or interests essentially operate like shares.
Aaron
I would like to change my tax status to s corp and continue running my business as an LLC.
The state of wisconsin seems to be fine with this but I can not get a good answer on whether this can be done from a federal perspective.
On one hand it would seem that all I have to do is elect s corp on tax return, fill out a form or two and I am good to go.
On the other hand, there is notion that I can only be taxed as an s corp by first becoming a c corp.
Do you have any experience with this situation and in the state of Wisconsin?
David:
S Corp election is a federal tax issue, so it is not dependent on state law. Thus, as long as you elect S Corp treatment and comply with S Corp rules in federal tax law, you can run your Wisconsin LLC as a Wisconsin LLC.
Aaron
If an LLC has elected to file as an S-Corp and they are a married couple filing jointly, do they have to file a Schedule K-1 to show their ownership of the company or do they put the total of the income, deductions, credits, etc. on their income tax return?
Danielle:
If an business is taxed as an S-Corp and it has more than one owner, I believe the business must file Schedule K-1 regardless of the relationship of the owners. This is one of the annoying aspects of having a business owned by both spouses.
I usually recommend that my clients have the business in the name of one spouse (owned by one spouse only) to avoid the need for filing Schedule K-1. Since ownership of a business is marital property (at least in Minnesota), if there is a divorce, the business is treated like all the other property owned jointly by both spouses.
Aaron
Does an LLC electing S-Corp status have to carry workmens compensation or can a waiver be used when a state allows waivers for sole-proprietors. Also, can retirement funding and medical expenses be reimbursed for an individually owned LLC electing S-Corp status.
Ralph:
Workers compensation varies by state, so you should ask your state’s workers comp agency. In Minnesota, an LLC electing S-Corp status does not have to carry workers comp for the owner and the owner’s immediate family members.
I’m not sure what you mean about reimbursing retirement funding and medical expenses. There are many ways to do this. I would recommend meeting with a CPA to discuss the options that are best for your circumstances. Here is the CPA I recommend: http://minnesotasmallbusiness.com/professionals/minnesota-cpa/
Aaron
Hi there. I have a partnership LLC (in Minnesota). My friend and I split the ownership 50/50. We obtained our official business license on 11/23/2011. We have business expenses starting from as early as May, 2011 and we would like to declare on 2012 taxes. We declared on form 2553 that we prefer a calander year, but I’m having difficulty understanding the “Election is to be effective for the tax year beginning (month/day/year)” Any suggestions? Do I enter our official State of MN business license date in this area or the date we obtained our Fed tax Id #?
Thank you
If I have an LLC holding title to rental income property, and an S-Corp (owned 50% by husband and wife) managing it, then would we be served well to make that S-Corp the managing parter of the LLC? What are pro’s and con’s of that scenario. If so, is it wiser to them make solely one of the spouses a limited partner in the LLC-how does it matter-you mentioned K-Schedule filing-(also, does it matter if there is outstanding debt on property that is held by solely one spouse).
Would filing the LLC as an S-Corp (even still continuing to have another S-Corp manage the property) make better or worse sense than treating the LLC as a partnership and having the managing S-Corp be the managing partner?
Darlene:
For questions on completing Form 2553, the best help will be in the instructions: http://www.irs.gov/pub/irs-pdf/i2553.pdf
On Form 2553, the line that states “election is to be effective for the tax year beginning (month/day/year)” is asking when you should start being taxed as an S Corp. Most small businesses operate on a calendar year, so January 1, 2012 would be the start date if filing by March 15, 2012. If you want it to apply to 2011, you should talk with an attorney or CPA about whether you can take advantage of any of the exceptions that permit you to seek a retroactive S Corp election.
Aaron
Val:
These are great questions. However, your situation is complex enough that you should ask an attorney to advise you. I couldn’t provide an adequate answer here. If I were advising you, I would have a number of additional questions to fully understand your situation and determine the best option for you. Also, I would assess whether it would be wise to simplify your arrangement with an S-Corp and LLC, to minimize complexities and related expenses.
Aaron
Aaron:
I currently have a single member LLC and I am filling out form 2553 to be treated as an S-Corp for Fed. tax purposes. My question is in regard to the questions that ask about, “date incorporated,” “state of incorporation,” and “title.” Since I set up an LLC I did not technically incorporate, so are they referring to the date of organization? Also, do you have to switch your title from a Member to a corporate title (pres., etc.) if you do the 2553 election? Thanks
Chris
Christel:
This form is used for corporations and LLCs. Accordingly, you can treat references to “incorporation” as also meaning “organized.”
You do not need to switch your title from “member” (LLC) to “shareholder” (corporation), “governor” (LLC) to “director” (corporation), or “manager” (LLC) to “officer” (corporation). You may continue to use LLC terms because your company remains an LLC.
Aaron
I have an LLC that has been reporting income on the cash basis. If we make a Sub S election, do we have to consider built in gain income on the Accounts Receivable that has not been taxed.
Aaron:
Are distributions to members of an LLC subject to Self-employment tax?
Todd:
In general, distributions to members of an LLC are subject to self-employment tax. However, there are exceptions. One exception is for LLCs that have elected to be taxed as an S Corp (See http://www.aaronhall.com/blog/can-an-llc-be-taxed-as-an-s-corp/). For your particular situation, you should consult with a CPA or attorney.
Aaron
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