Can an LLC Be Taxed as an S Corp.?
LLC taxes can vary, depending on how you structure your business tax arrangement with the Internal Revenue Service (IRS). Choosing to have your LLC taxed as an S corp. is one of the options.
LLCs and the IRS
You can choose how your limited liability company (LLC) will be taxed. An LLC may be taxed as a sole proprietorship, a partnership, a C corporation, or an S corporation. The IRS classifies an LLC in one of the following categories:
- An entity disregarded as separate from its owner. This applies to a single member LLC, and is essentially the same as a sole proprietorship. The income and expenses of the LLC are the income and expenses of the business owner.
- A partnership. This applies to an LLC with two or more members. The LLC itself is not taxed, but the profits of the LLC are taxed to the members.
- A C corporation. This applies to both single member and multi-member LLCs. An LLC taxed as a C corporation is taxed on its profits, then any profits passed on to the members are taxed to the members.
- An S corporation. There are no separate S corp. taxes. A multi-member or single member LLC taxed as an S corporation is not taxed on its profits, but the profits are taxed to the individual members (even if the profits are not actually distributed to the members).
What If You Do Nothing?
If you do not file any special forms with the IRS, your LLC will be taxed as either a sole proprietorship (if you are the only member) or as a partnership (if your LLC has two or more members).
Federal Taxes
If your LLC is taxed as a sole proprietorship, you will report the income and expenses of the business on your individual Form 1040, along with Schedule C, Profit or Loss From Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, or Schedule F, Profit or Loss From Farming.
If your LLC is taxed as a partnership, the LLC will file IRS Form 1065, U.S. Return of Partnership Income, which will show each member’s share of the profit or loss. Each member will report his or her share of the profits or losses on their individual Form 1040, along with Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.
An LLC taxed as a C corporation will file Form 1120, U.S. Corporation Income Tax Return. The corporate tax rate will be applied to any profits. If any shares of the profits are passed on to the members, each member will report his or her share on their individual Form 1040, along with Schedule B, Interest and Ordinary Dividends.
An LLC taxed as an S corporation will file Form 1120S, U.S. Income Tax Return for an S Corporation. Each member will need to report his or her share of the profits on their individual Form 1040, along with Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc.
Regardless of how the LLC is taxed, each member will be responsible for paying any quarterly estimated taxes, and self-employment tax, that may be required.
Should Your LLC Elect S Corp. Status?
The decision as to how to have your LLC taxed will take a number of factors into consideration, including the amount of anticipated profits, whether profits will be distributed to the member or retained by the business, whether you have employees, the benefits offered to employees and members, and how your state will tax the entity.
How to Elect S Corp. Status
If you want your LLC to be taxed as an S corporation, you need to file IRS Form 2553, Election by a Small Business Corporation. If you file Form 2553, you do not need to file Form 8832, Entity Classification Election, as you would for a C corporation. You may use online tax filing or can file by fax or mail. More information about S corp. status for your LLC can be found at www.irs.gov, including Publication 3402, Taxation of Limited Liability Companies.