Why would I want my LLC to be an S Corp?

The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

Why would an LLC elect to be taxed as an S Corp?

Many LLC’s choose the S corporation for its tax status because: It avoids the double taxation situation of corporations. S corporation owners can take the QBI deduction on business income (not employment income) Owners pay Social Security/Medicare tax only on employment income.

What advantages does an LLC offer over an S corporation?

Another advantage of the LLC is that there is greater flexibility in splitting up financial interests. Owners of LLCs can allocate profits and losses disproportionately among owners; an S corporation’s profits and losses must be allocated strictly based upon ownership percentage.

Can an LLC be an S corp?

For tax purposes, by default, an LLC with one member is disregarded as an entity. Or, in other words, is treated as a sole proprietorship. And, once it has elected to be taxed as a corporation, an LLC can file a Form 2553, Election by a Small Business Corporation, to elect tax treatment as an S corporation.

Can LLC become S corp?

You can switch your limited liability company’s (LLC) tax status to an S corporation, provided it meets the Internal Revenue Service’s (IRS) requirements. You don’t have to change your business structure, but you’ll need to file a form with the IRS.

Can a LLC be an S corp?

By default, LLCs with more than one member are treated as partnerships and taxed under Subchapter K of the Internal Revenue Code. And, once it has elected to be taxed as a corporation, an LLC can file a Form 2553, Election by a Small Business Corporation, to elect tax treatment as an S corporation.

Should I tax my LLC as an S corp?

Most states follow the federal IRS rules and don’t make S Corps pay income tax, but California is an exception. All California LLCs or corporations that choose S Corp taxation must pay a 1.5\% state franchise tax on their net income. This is paid by the business itself, not the LLC members or corporate shareholders.

What is a reasonable salary for an S corp?

In other words, if your S corporation earned $150,000 before shareholder salaries, and you wanted to maximize your 401k contribution, you might pay $150,000 as reasonable officer compensation which would be 100\% of your business income.

Whats better an LLC or an S Corp?

If there will be multiple people involved in running the company, an S corp would be better than an LLC since there would be oversight via the board of directors. Also, members can be employees, and an S corp allows the members to receive cash dividends from company profits, which can be a great employee perk.

What happens to an LLC when it becomes an S corporation?

When an LLC’s net profit passes-through to the owner’s individual tax return, it is then subject to income taxes (based on the owner’s tax bracket) and self-employment taxes. This is what happens in the “default” scenario for an LLC. The S corporation (S corp) is an IRS tax status that an LLC can elect.

What is an S Corp and how does it work?

S corp status allows business owners to be treated as employees of the business (for tax purposes). The S corp is still a pass-through entity like the default LLC (rather than a double-taxed c corporation), but with benefits.

How do I become an S-Corp?

To become an S-corp, your business first must register as a C corporation or LLC. In an S-corp, the business owners are called shareholders. As an owner, you are considered an employee of the business and must pay yourself a reasonable salary. An S-corp’s profits, losses, deductions and credits are taxed at the shareholder level.

What qualifies a business to be an S corporation?

To qualify as an S-corp, your business can have one to 100 shareholders. Your business must also be located in the U.S., and you must file with the IRS as an American corporation. Key takeaway: An S corporation is not a type of business – it is a type of tax election.