One popular option for LLCs is to elect to be taxed as an S corporation (S corp) instead of a sole proprietorship or partnership for the tax benefits. S corps usually pay lower self-employment taxes compared to sole proprietorships and partnerships.
As a single member LLC, you can elect to be taxed as an S-Corp as long as the election is made no more than two months and 15 days after the beginning of the tax year you want the election to go into effect. You make the election on form 2553. As an LLC owner, you’ll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company.
Tax Advantages without Incorporation
It turns out your LLC doesn’t actually have to become a corporation to be taxed like one. Instead of undergoing the complex incorporation process, you can simply file a few forms with the IRS and get the same tax advantages. But this option isn’t the best for every business. Consider the pros and cons before making a decision.
Corporate Elections for LLCs
An LLC that is elected to be treated as a corporation combines the best of 2 business entities — LLC and Corporation. It is an awesome step-up for existing LLCs.
LLC owners use the corporate tax return, also known as Form 1120, to report the corporation’s income, gains, losses, deductions, and credits to calculate its tax liability. Like Schedule C, you’ll need all of your company’s important financial information and statements on hand before filling it out.
An LLC can also file Form 2553 and elect to be taxed as an S corporation. S corporation status is a special tax designation granted by the IRS—it allows corporations to pass their corporate income, credits, and deductions through to the business owners, just like in a partnership or sole proprietorship.
Limited liability companies and corporations are both popular types of businesses, but LLC taxes can be very different than corporation taxes. A C corporation is not a pass-through entity. There is a corporate tax, and the corporation must file a tax return and pay taxes on its income. If it also distributes profits to shareholders in the form of dividends, the individual shareholders pay taxes on the income they receive as dividends on their personal taxes. This results in what’s known as “double taxation.”
Choosing the Right Tax Classification
Should my LLC be taxed as an S Corp?
The best tax classification for an LLC depends on various factors. To tax your LLC as an S corporation, you’ll need to file IRS Form 2553 by March 15 of the year in which you intend to file taxes as an S corporation. The form must include each shareholder’s name, address, Social Security number, and more.
The terms "LLC" and "S corporation" can be confusing for a new business owner. Compared to corporations, limited liability companies have a more flexible ownership and management structure that’s well-suited to many small businesses.
The LLC S corp election can be done by filling out Form 2553, which enables a company to be taxed as an S corp. This can save money on employment taxes by distributing profits to its members and any passive shareholders.
Tax is a significant consideration, and the wrong type of company could lead to higher tax payments. Therefore, many are choosing to be taxed as an S Corporation, rather than an LLC. To change your LLC tax status to an S-Corp, file a 2553 form with the IRS, attached to a 1120S return. This is a federal tax form that must be filed annually by all S Corporations.
For holding rental properties, a default LLC tax structure is often better than an S corp due to the nature of rental income being typically passive and not subject to self-employment tax.
LLC vs. C Corp Taxation
Why is LLC taxed as C Corp?
An LLC taxed as a C-corp may be beneficial, depending on your particular business needs and capital acquisition strategies. C-corp is a tax classification for corporations and LLCs, though it is more typically used by corporations. For small business owners, using an LLC can help avoid double taxation, as members can report their wages, salaries, and dividends on their personal tax returns. C-Corps are responsible for corporate tax, as well as payroll and franchise taxes.
Tax Structures for LLCs
There’s no specific “LLC income tax” in the Internal Revenue Code. LLCs can be taxed as disregarded entities, S corps, C corps, or partnerships. The number of members in an LLC will affect taxation options available. While LLCs provide flexibility in taxation, the choice of the best tax structure requires careful consideration.