S Corporation Tax Status for Your LLC

The IRS has changed its stance on the tax status of limited liability companies many times since Delaware first provided the legal framework for the entity in 1991.

Under the current federal tax law, you can freely elect which tax type you would like for your business entity, including partnership, corporation and, surprisingly to many, Subchapter S corporation. While most people choose the partnership option for their LLC, there are some great benefits to selecting Subchapter S tax status.

Why Elect S-Corp Status for Your LLC?

When you choose S-corp tax status for your LLC, your business is legally an LLC, which means fewer formalities, unlimited members, a fixed Franchise Tax and more flexibility in the structure of your company.

However, in terms of taxes, your entity is an S corporation, which means corporate tax breaks, pass-through income and no double taxation. The members of the LLC will be able to claim profits and losses on their personal tax returns, similar to a partnership.

The two most popular reasons to elect S-Corp status is to maintain some of your company's profits within the company and to eliminate self-employment tax.

Who Can Elect S-Corp Status for an LLC?

The owners of an LLC can elect S-corp tax status as long as they are U.S. taxpayers with valid Social Security numbers. If you are the single member in an LLC, your LLC will be considered a disregarded entity by the IRS but you can still elect S corporation tax status

If there are two or more members in your LLC, the IRS will consider your LLC a partnership but you can still elect S corporation tax status.

It is important to know

  • You and your LLC will be separate legal entities. The company should pay you (and other owners) a salary. It is a good idea to set up a separate bank account for the LLC soon after formation of the company.
  • Before you can elect S-corp status, you'll need to obtain an EIN (Federal Tax ID Number) for your LLC. After you receive your EIN from the IRS, you must file Form 2553 with the IRS within 75 days of the beginning of the tax year in which you want the election to take effect.
  • The managing members of the LLC with S corporation tax status will be considered employees as well as owners.
  • You can only elect S corporation status if all members of your LLC are American taxpayers with valid Social Security numbers.

LLC Filing as an S-Corp: IRS Guidelines

When it comes to filing tax returns, be sure to follow instructions based on the tax status you've elected.

According to the IRSif a qualifying LLC elected to be an S Corporation, it should file a Form 1120S, U.S. Income Tax Return and S corporation laws apply to the LLC. Each owner reports their pro-rata share of corporate income, credits and deductions on Schedule K-1 (Form 1120S).

In some ways, the combination of a limited liability company as the entity type and Subchapter S as the tax status is the best of both worlds.

Your company can be structured as you wish, according to your LLC Operating Agreement, and is still authorized to receive corporate tax breaks without being subject to self-employment tax.

If this unique combination is of interest to you, please discuss it with your tax and/or legal advisor, as Harvard Business Services, Inc. is neither a law firm nor an accounting firm, and the above description should not be taken as legal or tax advice.

We can, however, help you form your Delaware LLC and obtain an EIN for your company. Simply call 1-800-345-2677 for assistance.

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