LLC Electing To Be Taxed As an S Corp (2024 Guide)

Atty. Danya Shakfeh
Published by Atty. Danya Shakfeh | Author
Last updated: June 20, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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Whether you are planning to launch a limited liability company, or currently a member of an LLC, you need to determine which tax classification is best for your business.

As a corporate attorney with over a decade of experience, I assisted several organizations with business formation, as well as provided legal services and protection to their companies.

After consulting with our team of tax professionals at Venture Smarter, we'll provide an in-depth guide on changing your LLC tax classification to S Corporation.

Quick Summary:

  • An LLC that elects to be taxed as an S Corporation has the potential to save money on income taxes.
  • You can switch your LLC tax status without changing the business structure, but the company has to meet the requirements of the IRS to qualify as an S Corp.
  • The self-employment tax rate is 15.3%, 12.4% for social security and 2.9% for Medicare.
  • I advise business owners to keep diligent records since S corps are closely monitored by the IRS.


How is an LLC Taxed?

Two employees looking up how an LLC is usually taxed

An LLC is taxed as a pass-through entity. This means that the business does not pay any tax on its income, and instead, all profits (or losses) are "passed through" to the individual owners.

Net earnings on an LLC pass through to its owners in the form of self-employment income subject to 15.3% tax (social security 12.4% and medicare 2.9%) [1].

The IRS does not consider a limited liability company (LLC) to be a taxable entity.

An LLC is subjected to tax based on the number of members (owners) it has:

Why Elect S Corporation Tax Status?

Electing an S corp tax status allows you to reduce self-employment taxes by declaring part of your income as salary earned from working in the company. The remainder may be classified as dividend income acquired as a shareholder.

Only self-employment income is subject to tax, while company contributions are generally exempt from tax levies.

I inform clients to consider an S corp tax status if they operate a small business and would like to pay less on self-employment taxes.

Benefits Of The LLC Entity And S Corporation Tax Treatment

Woman near the window writing notes

Here are the major benefits of both an LLC and S Corporation status, as outlined by Venture Smarter:

  • As a business owner, you do not want to be personally liable for any lawsuits brought against your company. Having a limited liability company structure provides personal protection from business lawsuits and debts. This is one big reason why many new businesses choose to form an LLC.
  • A pass-through tax structure means that all profits and losses are reported on the individual incomes of the LLC members. For federal tax purposes, this saves business owners money because they do not need to pay separate taxes for their company, avoiding double taxation.
  • The IRS also allows an LLC to choose its tax year without providing a reason, which can be advantageous for new businesses.
  • S Corporation as a business entity has a status that allows your company to be treated like a partnership for tax purposes but still enjoy limited liability protection. This means you will pay only one level of taxation - at the shareholder level.

In addition to these benefits, an LLC electing S Corporation tax treatment can yield direct financial savings.

Opting for S Corporation status can bypass the standard corporate tax, although they must handle state and local taxes, which can reach up to 13.3% [2].

Additionally, the owners might pay federal personal income taxes on their earnings ranging from 10% to 39.6%. This structure facilitates tax efficiency and safeguards personal assets.

Read More: Reduce Self-Employment Tax

LLC Electing to Be Taxed as an S Corporation

Busy working on files with laptop

The rules for becoming a corporation are found in Subchapter S of Chapter 1 of Subtitle A of the Internal Revenue Code [3].

To qualify for S corporation status, the corporation must meet the following requirements:

  • It must be a domestic corporation
  • Has no more than 100 allowable shareholders
  • Have only one class of stock
  • Corporations, partnerships, and nonresident aliens cannot qualify as shareholders

Before applying for the tax classification, I advise my clients to produce all business documents and verify with the IRS if their company qualifies.

"Paying tax is not a punishment. It’s a responsibility."

– Chris Matthews, American Political Commentator, Former Talk Show Host & Author

When To Change Your Tax Election?

Working outside office with coffee

You can change your LLC tax election at any time, but at Venture Smarter, we advise clients to do this immediately upon formation to avoid extra paperwork.

First, your LLC has to file Form 8832 (Entity Classification Election) to be taxed as a corporation, then file Form 2553 (Election by a Small Business Corporation) to change your tax status to S Corporation.

For a business entity taxed as a corporation, this means filing Form 2553 with the IRS within 75 days of filing your Articles of Incorporation.

Similar Article: Converting an LLC to an S Corporation (Guide)

FAQs

What is the Best Tax Classification for an LLC?

The best tax classification for an LLC would depend on the number of members, company structure, and business goals.

Do I Need a New EIN if I Change My LLC to an S-Corporation?

You do not need a new EIN if you change your LLC to an S-Corporation. Businesses are only required to acquire a new EIN if the company’s ownership and structure changes.

References:

  1. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
  2. https://tax.thomsonreuters.com/blog/s-corp-vs-c-corp-vs-llc-whats-the-difference-and-which-one-is-better-for-your-business/
  3. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

About The Author

Author
Atty. Danya Shakfeh, with over ten years of experience as a corporate attorney, leads Motiva Law, offering strategic legal advice to entrepreneurs. She is skilled at transforming complex legal concepts into clear strategies, allowing clients to pursue their goals. A "Rising Star" by Super Lawyers and an alumna of Northwestern University Pritzker School of Law, Danya is distinguished in business law.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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