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Should You Elect S Corp Status for Your LLC?

June 20, 2023

Wondering what tax status is the most advantageous for your business? That depends on a few factors. We share the details here.

What is an LLC?

An LLC or limited liability company is an entity structure in which members of the company are protected from being personally liable for the company's debts and liabilities. The LLC business structure combines the pass-through taxation of a partnership with the limited liability of a corporation.

What is an S Corporation?

S Corporations benefit from many of the same tax benefits as partnerships. Namely, all of their profits and losses are passed through pro rata to the owners on their personal income tax returns. By comparison, the earnings of traditional C Corporations are taxed twice, first at the corporate level and again when income is distributed to shareholders. The downside, of course, is that S Corporation owners must pay their share of the company’s tax bill personally even if they receive no cash distributions for the tax year.

Taxation of LLCs

Since an LLC is a business entity defined by state law, an LLC can choose an S Corporation tax structure, but this is not the default. By default, a single-member LLC will be treated as a sole proprietor by the IRS whereas an LLC with more than one member will default to partnership status.

What are the benefits of electing S Corporation status?

This is best illustrated with an example. Let’s say you are the sole member of an LLC that earns $150,000 in net income. Under the LLC structure, all $150,000 will pass through to you as self-employment income and you will owe self-employment tax of $22,950, or 15.3% of $150,000, in addition to income taxes.

The S Corporation structure, however, allows you to have $75,000 pass through as earnings and $75,000 distributed as dividends. You would then only owe $11,475 in self employment tax.

Another big benefit of S Corporation status is that, under a change in the TCJA, certain pass-through businesses are eligible for a 20% Qualified Business Income deduction.

How can a business elect S Corporation status?

Single Member LLC

  • File Form 8832, Entity Classification Election
  • File Form 2553, Election by a Small Business Corporation

Multiple Member LLC (partnership by default)

  • File Form 2553, Election by a Small Business Corporation

Wondering what is best for your business? We can help. Contact us.

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