An LLC is an entity created under state law for federal tax purposes, and can be treated as a sole proprietorship, a partnership or a corporation. An S-corporation is an entity that passes corporate income, losses, credit and deductions to its individual shareholders for federal tax purposes. Choosing your business to be treated as an S-corporation by the IRS does not change its organization under state law as an LLC. Certain limitations must first be met before you change your LLC into an S-corporation.
To meet the restrictions imposed by the IRS on entities looking for a designation as an S-corporation, your LLC must be a domestic entity with only one class of stock, and have fewer than 100 members that are considered shareholders of the putative corporation. Those shareholders can include individuals and certain types of trusts and estates, but may not include partnerships, corporations or nonresident aliens. Additionally, certain types of regulated businesses, such as certain financial institutions, insurance companies and international sales corporations, cannot elect for S-corporation treatment. Meeting these requirements may involve making some changes to the structure and ownership of your LLC.
Use IRS Form 8832 to instruct the IRS on how to classify your business entity. As an LLC, your election can be any one of the three types recognized by the IRS for this type of entity. If you have already classified your LLC to be taxed as a corporation, you do not need to refile Form 8832. However, if your LLC was previously being taxed as a partnership or sole proprietorship, you must file Form 8832 and mark box 6a to elect taxation as a corporation. If your LLC is a foreign entity, you cannot change your LLC into an S-corporation.
Forms and Time Frame
Use IRS Form 2553 to elect to be an S-corporation. For the election to take effect in the current tax year, it must be filed not more than two months and 15 days from the beginning of the tax year. Otherwise, the election will take effect in the following tax year. All members owning a share of the LLC on the day of election for treatment as an S-corporation must sign the election form. You must file Form 1120s as the tax return for the LLC in the tax year in which your election for S-corporation treatment takes effect.
The most notable effect of electing for federal tax treatment as an S-corporation is that you will no longer be subject to the self-employment tax levied on general and limited partnerships. [You will, however, be required to pay a reasonable salary to anyone who provides services to the LLC, including members, and these payments are taxable wages even if paid as distributions or dividends. You will not need a need a new Employer Identification Number, or EIN, as a result of electing for taxation as an S-corporation.
Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.