To lawfully run your business and maintain it in compliance with the state, you’ll have to pay taxes. The best thing about a limited liability company is that by opening an LLC, you’ll get flexibility in terms of taxation. Initially axed as pass-through entities free from paying business taxes directly, LLCs have two more options. Thus, you can get your LLC taxed as an S-Corp or C-Corp by applying the procedure of switching to a different taxation system. If you want to know how to do that, here, you’ll find a brief but comprehensive guide on electing an S-Corp status for your LLC.
An LLC is a relatively new business structure that appears to adapt to a modern business environment and make legal business more attractive, simpler, and feasible for anyone. As such, this structure is more flexible and less bureaucratic than corporations and more secure and protective than partnerships. In fact, it takes the best of both worlds and transforms it into a new legal model that proved to be viable and effective. And flexible taxation is one of the biggest LLC fortes.
As such, an LLC has three taxation schemes at its disposal. By default, it is taxed as a pass-through entity, which means all company profits and losses are transferred to the personal tax returns of the company owners for taxation purposes. Sole proprietorships and general partnerships are exposed to the same scheme. Yet, while you avoid paying business taxes and set them off at a personal level, you shouldn’t forget about self-employment taxes that will eat up 15.3% of your personal income. On the other hand, a 20% business profit deduction under the Tax Cuts and Jobs Act will compensate employment taxes in full.
Besides, when launching an LLC, you can choose it to be treated as a C-Corp or S-Corp for taxation purposes. With C-Corp, you’ll have to pay taxes on both corporate and personal levels (double taxation) while keeping self-employment taxes at bay. However, pass-through tax deductions will be not valid as well. So, this model is not the best option for smaller companies and is one of the most expensive overall. An S-Corp status, on the other hand, will let you avoid dual taxes and save on employment taxes, thus, smartly minimizing tax payments.
At a glance, pass-through LLC taxes are not much different from that of an S-Corp since the corporate model also supposes filing company profits as a part of the owners’ personal tax returns. However, where S-Corp taxation does differ is the self-employment taxes. When you form an LLC and choose it to be taxed as an S-Corp, the company owners could be regarded as the shareholders in the eyes of the law and taxed as common company employees. This way, no self-employment taxes are charged over the LLC owners’ profits and dividends. Yet another plus is that a 20% deduction on profit under the Tax Cuts and Jobs Act is also valid further minimizing the taxed amount of the company income. Despite the fact that there might be some minor tax intricacies to be taken into account in any specific business situation, overall, S-Corporation treatment certainly gives an LLC flexibility when searching for tax optimization routes. Just remember about legal restrictions related to S-Corps. If you don’t meet those requirements, your LLC won’t be eligible to qualify for an S-Corp taxation status.
The Internal Revenue Service or IRS responsible for all tax issues at the state level is the authority that has the power to change your company taxation status. To select an S-Corporation taxation status, you need to submit Form 2553 (another name is Election by a Small Business Corporation) to the IRS within 75 days from the date of LLC formation or from the beginning of the tax year if you want to change your current LLC tax status. Apart from the company name and location address, the document should cover essential tax data such as an EIN (Employer Identification Number) and federal tax numbers or social security number of all the company owners along with their names and physical addresses. To validate their legal move, all company members should sign this form before filing it.
If you want to learn more about S-Corporation and limited liability company taxation to better understand the whole system from within and weigh all pros and cons of each taxation status, feel free to visit the official IRS website and read Publication 3402.
If you are new to the business and know little about the intricacies of business processes, most likely than not, taxation issues look intimidating and confusing for you. So, while you certainly can complete all the processes on your own, hiring a professional assistant is always a better idea, especially if you want to save time and effort. Online LLC services are a perfect alternative in this concern since most of them not only ensure quick and painless business formation but also provide a wealth of associated services to help you maintain your company in good standing. Electing S-Corporation taxation is one of such added services. Usually, it is optional and comes at a cost. However, the rates are usually not high and pay back with your peace of mind. If you’d ask our advice, Northwest Registered Agent and IncFile will be our best recommendations. They will prepare and file Form 2553 for you at only $50. At the same time, both companies have a lot to offer in the business formation process too. Not to make a random choice and find out more about these services, check a detailed IncFile vs Northwest Registered Agent review.
An S-Corp taxation status is not a common option for each and every LLC. Combining the benefits of the limited liability with the advantage of the S-Corp taxation model, this status is a great legal alternative for tax optimization in certain situations. However, to know if it is beneficial for your business formula and scenario, first consult a tax expert before making any moves.