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Can an LLC be taxed as an S Corp?

Can an LLC be taxed as an S Corp?

Single member LLCs can choose to be taxed as an S-Corp under certain conditions. The S-Corp election must be made no later than 75 days after the beginning of the tax year, otherwise it won’t go into effect until the following tax year. This 75-day window allows businesses to retroactively make the switch for the previous year.

LLC Status is NOT a Tax Designation!

First things first – LLC is not a separate tax designation! Many people get confused and believe that forming as an LLC automatically makes you an C Corporation. While the default formation of a corporation is generally as a C Corporation, LLCs are governed by state law, not federal law. 

LLC stands for “Limited Liability Company.” Usually, when someone forms a small business, they do it informally and either on their own or with only one or two partners. When this type of business is formed, there is no separation between the owner and the company when it comes to debts, liabilities, and taxes. 

States allow companies to form LLCs to limit their personal liability. Typically, you would file articles of incorporation, pay money to register with the state, and even potentially file for an EIN if you plan to open separate accounts or pay employees. While you’ve incorporated on the state level, eligible entities (such as single member LLCs or partnerships) are not required to file Form 8832. If you wish to be taxed as a C Corporation as a single member LLC, you would need to file the form.

How You Elect S-Corporation Treatment Depends on Your Formation

If you are just forming, electing to be taxed as an S Corporation is as easy as checking the first box on the  Form 2553, Part II. This is the Election by a Small Business Corporation form, which allows you to elect an S Corporation tax structure. If you have already formed as a single member LLC, you still only need to file the Form 2553. In this case you will select either box 2 or 3 to switch to an S Corporation.

If you have formed as an LLC taxed as an C Corporation, you may need to file Form 8832 to change your business formation before electing S Corporation status using Form 2553. But if you inadvertently failed to elect S Corporation status, you may be able to file Form 2553 within three years to correct it.Once done, S Corporation status will require you to file an additional tax document each year, Form 1120S. This is the US Income Tax Return for an S Corporation.

Why would a person with a single-entity LLC switch to an S Corp?

Although being taxed like an S corporation is probably chosen the least often by small business owners, it can actually provide significant tax savings. This is often the case, for example, when an LLC has high payroll taxes.

Regardless of the reason, business entity selection is one of the most impactful tax decisions a business owner can make. Understanding how a selection will impact their tax positions is key. An LLC taxed as S Corp can give flexibility on income treatment. 

All that said, here are some key benefits to having your LLC taxed as an S Corporation:

  • No Double Taxation: While still having pass-through income as if your LLC was treated as a proprietorship or partnership, you will avoid double taxation levied on C Corporation.
  • Avoid tax on Self-Employment Contributions: You can pay wages to yourself or other owners which is subject to FICA tax, but you can distribute the remaining net earnings as dividend income which isn’t subject to SECA tax.

If you think electing to have your LLC taxed as an S Corp is the right decision for your business, it could be beneficial to first consult with a tax planner. This is because even if choosing an LLC to be taxed as an S Corp could benefit you for the reasons mentioned above, there may be other considerations you need to think about.

If after analyzing your business structure selection you find that an LLC electing treatment as an S-Corp gives you the best of both worlds (ease of administration plus tax savings) then consider making the switch!

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