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, c corp, sole proprietorship, or partnership. How the IRS views an LLC can be confusing for business owners.
By default, a single-owner LLC is treated as a sole proprietorship and a multiple-owner LLC is treated as a partnership. But LLC owners can file a form with the IRS to change this so the LLC is treated as a C corporation or S corporation for tax purposes.
Option 1: LLC electing to be treated as a C corporation (C corp)
If your LLC has one owner:
If the LLC has only one owner, the Internal Revenue Service (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).
If your LLC has more than one owner:
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 corporation (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.
4. Special deadline for new businesses seeking S corp election
If you form a new LLC, you have two months and fifteen days after you formed the LLC to file the S corp election with the IRS. For example, if you form a new LLC on June 1, you would have until July 15 to file Form 2553. However, you should file Form 2553 as soon as possible after forming an LLC to avoid cutting it close and missing the deadline.
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Hi Aaron,
Thanks for clearly answering all of the questions.
I own a single member LLC and am considering filing as an S-Corp. The reason is to pay myself a reasonable salary and pay the rest as distributions (which of course are not taxed by FICA).
My questions is this:
As an LLC I pay myself from my business account when I need it and the amount I need. As an LLC, with S-Corp status, can I still pay myself distributions whenever I see fit? Or does it need to be quarterly or somehow regimented?
And does my salary need to be setup in regular intervals or can I pay myself salary as profit is earned?
Many thanks!
Matt
Matt:
As an owner of an LLC taxed as an S Corp, you can pay yourself distributions whenever you see fit. For example, it could be once a year or simply whenever you have extra money in your bank account.
You can also pay yourself a salary as profit is earned. That is, you don’t have to pay yourself if the business has no money. Keep in mind that you will need to do quarterly withholdings and the associated tax reporting. I suggest you talk with a CPA about this, since a CPA deals with the logistics of this on a daily basis.
Aaron
I am looking to take advantage of the benefits of an s corporation. I have an llc right now and am an insurance agency. If I file the form 2553 in the next day or two, do I get to take advantage of the s corp status for the whole 2011 tax year? Also, do I need to change anything with my ein number?
Jayson:
Yes, if you file the Form 2553 (assuming your LLC qualifies), you can take advantage of the S Corp status for 2011. You should not change anything with your EIN.
Aaron
Hi Aaron,
Thanks for the quick answer! One more thing. Do I hold off on quartely payments until I get word back from the IRS? I’m just wondering if I should start operating paying myself a reasonable wage and paying distributions now, or if I can just classify it accordingly for the whole year once I get confirmation?
Jayson:
A CPA will have more knowledge about the logistics of this. Please direct this question to your CPA.
Aaron
Hello Aaron,
I would like to elect for my current llc to be treated as an S corp by filing form 8832. I understand that the effective date must be within the last 75 days. So if I filed today (feb 14, 2011) and choose Dec. 30, 2010, for example, as the effective date, does that mean my entity will be treated by IRS as an S corp for the entire 2010 tax year (since the election was effective in 2010) ? I would like my llc to be treated as an S corp for my 2010 taxes if possible. Thanks so much for any thoughts.
Mike:
I agree, the IRS instructions are a bit cryptic. The Form 8832 instructions provide as follows:
If your LLC is new, you have 75 days from the date it is started to make your S Corp election. If your LLC is not new, then you must make the S Corp election in the first 75 days of the year in which it is to apply. Thus, if you file Form 8832 in July of 2010, the soonest it could take effect is January 1, 2011. Likewise, if you file Form 8832 in February of 2011, it could take effect on January 1, 2011.
Late Election Relief
The IRS has an exception to this rule called “late election relief.” However, that exception has four requirements that must be met. The third requirement is the most difficult. The third requirement is this: “The entity has reasonable cause for its failure to timely make the entity classification election.” Simply forgetting or not realizing that you needed to file is not “reasonable cause.” Reasonable cause would be, for example, if you told your CPA to file in time, but do to the CPA’s error, the paperwork didn’t get filed on time. Thus, it is difficult for most business owners to take advantage of the “late-election relief,” because the real reason they didn’t file on time is they just didn’t think about it.
Aaron
Hi,
Assuming that an LLC is taxed as a partnership (by default). Is it true that it is actually incorrect accounting to take distributions without paying FICA, SS, etc. taxes? All distributions are subject to self-employment taxes. I heard that this is one of the biggest (unintentional) violations by LLC owners and their accountants and if IRS audits and discovers this, the LLC will have to pay all of the taxes and interest on all of the money paid out to its members.
DK
DK:
Yes, it is true that an LLC taxed as a partnership or sole proprietorship must pay self-employment tax. And you are correct that most LLC owners do not know this.
Aaron
My wife and I are looking to start an LLC business. To start we would be the only members. If my understanding here is correct we can form the LLC, choose to file taxes as an S Corp, pay ourselves a salary (W/H FICA, state, federal income tax etc., submit quarterly 941′s) and give ourselves distributions on the difference when there is profit?
PS:
That is all correct, with some additional points:
1. As you know, you must elect S Corp status before filing as an S Corp.
2. If you and your wife both own the S Corp, you will have to prepare a K1 form each year. I recommend that the business be owned by one spouse so that you can avoid this extra paperwork. If couples get divorced, the ownership interest in the LLC is marital property, so there is no drawback to putting the ownership in the name of just one spouse.
3. All of the information on this site is general education, but I always recommend that people talk with an attorney before relying on the information here because there are exceptions that may arise from your circumstances that are not covered here. Our rate for forming a single-owner LLC is $450 plus the $170 filing fee, and that includes a one-hour meeting with me and free follow-up phone calls to ensure the business gets off to a good start. Also, it often costs more to fix errors than doing it right the first time.
Aaron
Also, if we do add members can we still have a salary and they be a draw only on profits if we file as an S Corp?
PS:
In a business taxed as an S Corp, sometimes owners who do no work can take all of their income as profit, so they don’t have to pay self-employment tax on it. However, this is a tricky area of tax law, so you should consult with an experienced CPA before doing this.
Aaron
Hi i am going to open one business like food company and i want to know what is best for me s corp or llc in this company will be faimily owned and i want every one work in w-2 please let me know
THANKS
Beg:
Determining the best business for you would require an analysis of your circumstances. Our firm does this for new businesses quite frequently. Our usual hourly rates apply. Please contact us to schedule an appointment if you are interested.
Aaron
We have an LLC and were planning on having it taxed as a partnership to avoid any potential double taxation issues, but my partner and I would prefer to get some w-2 wages for income verification purposes down the line. If we elect S-Corp status, now for 2011, do we have any double taxation issues to be concerned about? Assume salaries of $90k each and LLC profit AFTER these wages of $150k resulting in k-1 distribution so f$75k each. On other side note, we have a third member in the LLC that receives revenue sharing with th resulting profits divided equally by me and the other partner. Does this allocation disallow us from having the S-Corp election?
Tim:
Electing S-Corp status does not create a double-taxation issue because an S Corp is not taxed twice (like a C corp). Like a partnership, an S Corp is a pass-through entity.
Regarding your other issues, I recommend meeting with an attorney or CPA. I’m not exactly sure what you are asking. However, even if you are allowed to do what you are asking, it may not be the best option. Your business is large enough that you should spend the money to have professionals (attorney and CPA) working with you to avoid unnecessary taxes and liability.
Aaron
Hi, I started an llc in mid dec 2009 and elected s-corp status in the begining of 2010. I didn’t actually open the biz until nov 2010 and didn’t actually have any revenue until mid december. I did not realize how complicated the taxes etc. would be compared to an llc and would like to revert back to an llc. I looked on several forums and sites online and the majority say that you can’t go back to being an llc. If you submit a new 8832 form you will now become a corp not a llc. Also can I even do that because on the form it states i have to wait 5 yrs, would that apply in my situation?
Thanks
Jacky:
As you know, the general rule is that you must wait five years. This is called the 60-month limitation rule. Under the 60-month limitation rule, once a business elects to be taxed as an S Corp, the business generally cannot change its classification by election again during the 60 months after the effective date of the election. However, the IRS may (by private letter ruling) permit the business to change its classification by election within the 60-month period if more than 50% of the ownership interests in the entity as of the effective date of the election are owned by persons that did not own any interests in the entity on the effective date of the entity’s prior election. See IRS Regulations section 301.7701-3(c)(1)(iv) for more details. Please note that the 60-month limitation does not apply if the previous election was made by a newly formed eligible entity and was effective on the date of formation.
For your specific situation, I recommend that you consult with a CPA in your state who is knowledgeable in this area.
Aaron
I have a client in CA who registered as LLC and then he applied to IRS and was qualified for filing as S corp. What form do i have to file for CA? 100S or 568? The SS website appreas to be LLC.
Aram:
I can’t advise you on what the process is for California, because I am a lawyer in Minneapolis, Minnesota. I suggest you contact a CPA or attorney in California.
Aaron
If you can answer this simply I would appreciate it. I have an LLC that was a partnership. The partnership dissolved as of last year. I am filing an 8832 to be treated as a corporation and to not be considered disregarded. Do I also need to file the 2553 so as a corp I would be an SCorp?
Thanks
Dave:
I cannot answer your question without knowing more about your situation. I suggest that you ask your CPA or attorney about this to ensure it is done correctly based on your specific circumstances.
Aaron
We have created a LLC and now would like to file the correct form to be treated as a S-Corp. The instructions are not clear if you need to file both a 8832 ans 2553 or just 2553.
Any suggestions. The LLC is new and will begin to operate on 04/01/2011. This is also a 2 person LLC.
John:
Generally, an LLC can file Form 2553 and not Form 8832. The instructions for From 2553 provide as follows:
To analyze your particular circumstances and advise you on the process, I suggest you contact a CPA (cheaper than an attorney) or attorney.
Aaron
Hello sir,
Should i opt for an LLC treated as s corp for taxes to avoid self employment tax? Now, i opt for that (i am single member of LLC) and take $40,000/yr as salary and there is remaining $200,000 in profits for LLC. So it will get 100% transferred to me as i am the single owner? am i correct? Also can i deduct my business costs (like advertising, car expense, website and hosting, independent contractors payment etc) from profits ?
Harry:
The scenario you mentioned is generally correct. A determination of whether that scenario is right for you should be done by an attorney or CPA who understands your particular circumstances.
Aaron
I am now LLC and thinking about filing 2553 to be taxed as S-corp to reduce my SE taxes. I am going to file in April 2011 to be effective starting may 1, 2011. I guess this would be considered as late filing, right? So I will file separate tax return from Jan ~ April as sole proprietor and from May ~ Dec, as S-corp. Does this sound like a correct approach?
Young:
It is unclear to me whether you are changing your tax year from a calendar year (January to December) to begin April 1. This is a complex matter, so you should consult an CPA on this.
Aaron
Mr Hall:
My LLC’s entity creation date is May 2009 with the state. The LLC conducted zero business activity until March 2011. Applied and was accepted for an EIN with the IRS in March 2011. Filing election as an SCorp form 2553, assuming all other qualifications are meet and since past the 2 months and 15 day deadline for this calendar/tax year. Will the IRS view the election as new based on EIN filing and grant election for 2011? Or consider the election late based on the entity creation date and deadline? Thank you in advance.
Jody:
You question is essentially, “the IRS says they won’t accept elections after the deadline, but will they accept mine after the deadline?” I doubt that they would. But as I reiterate often on this blog, you should consult with a CPA or tax attorney to determine whether exceptions might apply to you.
Aaron
I just registered my LLC with FL, and I am getting ready to request the EIN number with IRS, but by reading all the other answers here, I am confused as of what would be best, saying my LLC is a single member or several? What are the difference when selecting to be an “S” corp, if single or multiple members of an LLC. thanks
Nancy:
Your question is beyond the scope of this article. I recommend that you contact a CPA or attorney in your state for assistance.
Aaron
I’m confused about one thing. Why would a person want to create an LLC and have it taxed as an S corp? Why not just open an S corp? Is it simply because by doing the former, you merge the best of both worlds? My confusion is simply, what advantages do I gain creating an LLC and electing to have it taxed as an S corp vs. just creating an S corp out the gate? Thank you kindly in advance.
Calvin:
It is true that an LLC taxed as an S Corp must comply with S Corp rules. So it is fair to ask why it wouldn’t be better to just form an S Corp. The main reason is the flexibility of an LLC electing the tax status it wants, which may involve changing the status as the business changes. For example, many small business owners know that they will only have $20,000 in profits the first few years and they don’t want the annoyance of quarterly tax filing and withholding that is required for an S corp. Later, after the business grows, the owners may want to elect to be taxed as an S Corp.
Also, many LLCs already exist, and this article explains how their owners can take advantage of the tax break available to S Corps.
Aaron
I am the sole owner of a Texas LLC. My wife and I file a joint 1040. Do I have to file an additional 1040 with the Schedule C and SE?
Jim:
You should not have to file an additional 1040. However, you should talk with your tax preparer to determine what forms, if any, are required after the tax preparer is fully informed as to your situation.
Aaron
Aaron
From reading all of the above i think i could raelly do with meeting you to discuss a few things in more detail. My business is based in the twin cities area. Can i have some contact details for you?
I have just set up an llc and im now thinking i should have done an s corp. My wife and i are the managing members and set this company up to pay ourselves and keep on top of our taxes as our money comes in from our uk company.
As i understand it we are going to be taxed as self employed? Is this the whole amount that comes in to the company or just the amount we personally take out? With an s corp we can pay us a salary which is taxed at what rate? and take a dividend that will not be taxed but does the company pay tax on this.
Also say my company has $100k in a year and i have paid me and my wife a salary does this go down as a company expense meaning in this example only $50k is taxable.
Question Questions…….
Also what would you charge for your time?
Many thanks
Ryan:
I am happy to meet with business owners and prospective business owners to help them ensure their business is legal, limit their liability, and reduce business risks and taxes. You can either “buy an hour of time” or we have some other fee structures (such as a flat fee for forming a business). Feel free to contact me.
Aaron
I currently have a business established simply as a sole proprietorship. I would like to incorporate (S-corp) to reduce SE taxes, but I would like the flexibility of the LLC taxed as a S-corp. Do I first form the LLC or do I first elect S-corp status?
Michelle:
An LLC electing S Corp tax treatment loses the flexibility of an LLC, because an LLC electing S Corp tax treatment must follow S Corp rules.
If you want an LLC electing S Corp tax treatment, you first form the LLC and then elect S Corp tax treatment.
Aaron
I am setting up an LLC to operate a multifamily rental property. If my LLC pays no salaries to any of its managing members and elects to be taxed as an S-Corp, does that mean neither the LLC nor its managing members have to pay the federal employment tax? Whereas, if taxed as a partnership, the individual managing members would each have pay the federal employment tax along with their federal income tax? What about non-managing members (i.e. passive investors)? I find this issue very confusing. Thanks in advance.
Mike:
The analysis is much more complex than that. To do this right, you need to talk with an attorney or CPA. The small amount you spend on CPA or legal fees will be far worth the potential tax savings by doing it right.
Aaron
I am my wife are NOT eiligible to open a S-CORP, since we both are residents of IL,USA but NOT permanent residents.So we plan to open a LLC in wife’s name in IL with me being employee. Can we elect to be treated as S-Corp for taxation purpose.
Niel:
You can’t be treated like an S Corp unless you fully comply with all S Corp requirements. Whether you comply with S Corp requirements would require an analysis of your situation (I realize you believe that you are not eligible, but I’m not sure I agree with your conclusion), which could be done by a CPA in the state of your business.
Aaron
My understanding of qualification to opening a S corp is that you should a US citizen or a resident, which means if you are in US for over 183 days in a calendar year you are a resident and you should be able to open a S Corp. If you are away from US for more than 183 days than you loose your S Corp Status. Can you please verify or comment on this. Thanks in advance!
Sam:
As you know, “residency” in the U.S. is more than simply being in the country for 183 days. For immigration matters like this, I suggest you contact an immigration attorney. If you don’t have one in your area, contact my office and we can refer you to a good one.
Aaron
Aaron – thanks for this article. After spending an hour trying to figure out the pros and cons of electing an S-Corp for my LLC, I stumbled onto this blog. Ten minutes of reading everyone’s questions and your straightforward non-legalese answers and I have my answers.
Thanks – I wish I lived in the Twin Cities. I would hire you immediately. But man, what is up with those Twins this year?!
Jay M.
San Antonio
P.S. And no, this is not Aaron’s brother shamelessly shilling for him!
Hi Aaron, great blog. Really appreciate the education you are providing everyone. I will preface my questions with the fact that I have an appointment this next week with a CPA and am guessing I will need to get one with an attorney as well. Here is the situation, I am the manager of a self-directed IRA. Checkbook access thru an established LLC. I would like to fund a startup business where I will have no personal involvement, and the new small business does not have any IRS deemed “disqualified” individuals in any capacity. The best option based on what we know at this juncture is selection as an LLC structure for the new business with election to be taxed as an “S” corp. The LLC I manage would be a 49% owner of the new startup business and have no role in the operation other than initial capital funding. My two questions are:
1) It appears the LLC I manage could just receive distributions of profit (K-1) based on ownership and then file the appropriate 990-T for the UBIT associated with the distribution….sound correct?
2) Also I am curious since I will personally have no individual ownership/ involvement in the new startup business, it would seem that the business could function without regard to concerns about prohibited transactions and disqualified individuals ect., once it is formed and funded? In this case I would hate to have to tell my mother she couldn’t buy flowers from the new florist shop in town because my LLC was part owner and she is a disqualified individual….:-) Thanks!
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