If you own a LLC or have formed an LLC recently, you may be wondering “Can LLC be S Corp (For Tax Purposes)?
Short Answer is Yes. LLC is a very flexible entity. LLC can be taxed as a C Corp, S Corp, General Partnership or a Disregarded Entity.
We have compiled a list of questions we hear from many LLC owners and answered them for you.
How to make LLC as S Corp?
In order to make LLC as S Corp for tax purposes, you need to file an election with IRS. You need to file form 2553 with IRS either via mail or fax within 75 days of formation of the LLC. Once IRS will accept your election you can file form 1120S as an S Corporation.
If you forgot or were not aware of the requirements and have reasonable cause, IRS has provided Late Election Relief. You can read our detailed article about “S Corp Late Election”
How do I know if my LLC is an S corp?
Once you file form 2553 either via mail or fax, IRS mails you a formal letter staring that they have accepted your S Corporation election. IRS also specifies a date that clearly tells you when the election is effective. Make sure you save this letter and also provide a copy of this letter to your accountant or tax preparer so they know what tax form to file your entity.
If you are unsure or didn’t receive the letter you can all IRS and ask them to resend the letter to you. Here is IRS business Phone number that might be helpful for you 800-829-4933.
Why do I need LLC for my business?
If you are small business owner and have assets such as home, rental properties, vehicles, money in stocks or investment accounts of bank accounts, then LLC can definitely be beneficial for you.
- It will help provided Limited Liability in case of a Law Suit or any other financial or business issues.
- It will allow you to pay less taxes as compared to sole proprietorship by electing to be taxed as S Corp and avoid paying Self Employment tax.
- Allow you to build a separate credit for your business instead of using your personal credit
- It allow you to add other people as part owners hence allowing the business to continue operating in case of your death or accident
Is LLC good for Small Business?
Yes. LLC is good for small businesses as it provides the following Benefits:
- Limited Liability for Members
- Separation of personal and business assets (Less Chance of an audit)
- Tax Choice to be taxed a C Corp, S Corp, General partnership(multi Member LLC) or Disregarded Entity for Single Member.
- Ability to Build credit under the LLC instead of just personal social security number.
Do you need a business account for an LLC?
Yes. Its Highly recommended by attorneys and accountants that you open a separate Business Account for an LLC.
You need to not only have a business account for bank you also need to apply separate credit car for the LLC as well. This way you pay all the business expenses using your LLC credit card. At the end of the month pay the business credit card bill from the business account.
Furthermore, its critical that you do not co-mingle your business and personal expenses in case of an audit it will be very difficult to prove a expense is business if its paid out of your personal account.
LLC or S Corp for Small Business?
Both entities have their advantages and disadvantages when it comes down to Legal and Taxes.
Which entitry is better depends upon many factors such as your Gross Revenue, Net Income, and Shareholder(Residents or Non residents)
Based on me doing taxes for thousands of taxpayers over last 20 years, I strongly believe for most small businesses ,S-Corporation is a better choice. It not only provides limited liability but also helps you save Self Employment Taxes(15.3%)
If a Small Business Taxpayer has gross income of $200,000,
Business Expenses of $50,000(Excluding Shareholder Salary)
and Net income of $150,000.
Under a S Corp Sharehodler can take a resonable salary(w2) of $50,000 and take 100,000 in Distributions.
In this case taxpayer will save about $15,300 in Self Employment taxes on the 100,000 that they took in K1 distributions.
Hence S Corp will be much more beneficial.
Only time we recommend a LLC is if you have foreign shareholders as S Corp shareholders have to be US citizens or residents.