LLC Electing S Corp Tax Status

If you have a Limited Liability Company (LCC), you can elect to be taxed as an S Corporation. This means that you have the same legal protection as an LLC, but are taxed as if it were a corporation. You do not have to file a separate tax return for your LLC. Instead, by electing to be taxed as an S Corp, profits and losses flow through directly onto your personal tax return.

Why Would LLC Owners Want to Be Taxed as an S Corp?

There are several reasons you might want to be taxed as an S Corp: 1) An LLC protects your personal assets from any debts or liabilities of the business. 2) Not only do LLC owners get the benefit of limited liability but there is also pass-through taxation. 3) Members and owners get the benefit of capital gains tax rates. 4) LLC members can get tax deductions for business expenses. 5) Members can take advantage of retirement plans available to LLC.

Steps to Become LLC Taxed as an S Corp

If you want to create an LCC, you can do so under an S Corporation election. The following steps will help you: Steps_to_Become_LLC_Taxed_as_an_S_Corp

File Form 2553 to Elect Taxation

To be an LLC taxed as an S Corporation, you will need to file Form 2553 with the IRS within 2 months and 15 days when your company was either formed or adopted the LLC.

Appoint a Registered Agent

You will need to appoint a registered agent. This person acts on behalf of LLC and receives all official notices, summonses, or other documents.

Sign a K-1 Agreement

After LLC is taxed, you will receive a K-1 agreement. Owners are each required to report their share of income on their personal tax returns.

Issue 1099-Misc Forms for Reporting Income

When owners receive a payment, the LLC must issue a 1099-MISC. If the company loses money, it can also issue a 1099-MISC.

What if You Do Nothing?

If the company fails to elect for taxation, LLC will be taxed as a regular C Corporation. The company will then need to file its own tax return and pay taxes at the corporate level. They may also be required to file and pay taxes in each state where it operates.

How an LLC Being Taxed as an S Corp Works

When a company opts for LLC taxed as an S Corp, this generally changes how (Internal Revenue Service) IRS treats the company for income taxation. LCC members and shareholders pay a maximum tax rate of 15.3% (self-employment income). The breakdown for the tax is as follow: * Social Security – 12.4% * Medicare Tax – 2.9% Keep in mind that these taxes are higher if you are employed. As a result, employees and employers pay both halves of the tax. This means that employees pay 6.2% of the social security tax and 1.45% for Medicare. While the employers pay the other half. The company will then need to file annual reports and follow other rules that the IRS provides. LLC is treated as a corporation and they must file all the same forms and reports as any other small business.

How Can LLC Owners Avoid Paying Self-Employment Taxes?

Owners are not required to pay self-employment taxes. They have the option of being employees, consultants, or independent contractors. Employees work for an LLC just the same way they would work for any other company. Because of this, the company pays employees salaries and payroll tax. Consultants work on a contract. The company pays the contractor a fee for services and should report this on a 1099-MISC. The company should also use a contract to set the amount of work that should be completed by the consultant and deadline days. The company can also hire independent contractors and not pay payroll or self-employment tax.

Benefits of Being an LLC Taxed as an S Corp

The LLC taxed as S Corp has many benefits and this includes: Benefits_of_Being_an_LLC_Taxed_as_an_S_Corp

Avoiding Double Taxation

LLC can avoid double taxation since they do not have to pay tax twice on their income. This means that the company will only be subject to corporate tax on any profits, and members will then pay personal taxes on these same profits.

Limiting Liability and Flexibility

Being an LLC also limits the liability of members. The members are not personally responsible for debts, including court judgments or tax liabilities. This is because LLC cannot hold members liable for debts. At the same time, LLC can retain much flexibility since it remains a member-managed company. Meaning, the company can choose any date to be taxed and they may choose to change during the fiscal year.

Minimizing Paperwork and Overhead

The company will have less paperwork and overhead since members do not need to file taxes. This also reduces LLC costs.

Retirement Plans Available

Members can avail of the retirement plans available to LLC. For example, solo 401(k) and SIMPLE IRA plans for self-employed owners.

Disadvantages of Being an LLC Taxed as an S Corp

The LLC taxed as an S Corp has certain disadvantages, including:

Performance of Personal Income Tax Return

Members will be required to perform returns for the company. This means that members will be required to file two different returns (LLC and their own) each year.

Limited Liability Protection

If LLC operates outside of the structure, the company will not provide limited liability protection.

Inability to Claim Deductions

In addition, members will not be able to claim deductions that LLC could have claimed if the company was LLC taxed as S Corp. The company may only issue the 1099-MISC to members who actually receive their share of profits.

S Corp is a designation used for businesses that meet certain requirements and choose to be treated as such. LLC taxed as an S Corp means that the company will be taxed as a corporation and pass-through taxation.
The LLC may choose this option because of the tax advantage that this offers. Members will only need to pay taxes on profits, and not twice on income. In addition, LLC is allowed more flexibility in managing business affairs since it remains a member-managed company.
The company can get LLC taxed as S Corp by filing forms to obtain a special tax designation from the Internal Revenue Service. The company will then need to file annual reports and follow other rules that the IRS provides. This requires members to be active participants in LLC business affairs.
Members may be able to avoid self-employment taxes. LLC owners only need to pay themselves a salary, and they can take out profits as distributions without paying payroll taxes.
LLC taxed as an s corp offers many benefits, including limited liability protection for owners and more flexibility since LCC remains a member-managed company.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.