One of the biggest advantages of the limited liability company (LLC) is the ability to choose how you want your business to be taxed. In general, there are three main options for LLC taxation: pass-through (partnership style), C corporation, or S corporation.
If you’re interested in transitioning your LLC from the default general partnership style of taxation to the S corp model, you may be wondering how exactly this process works.
That’s why we put together this guide that breaks down everything you need to know about getting your LLC taxed as an S corporation.
It’s not a terribly complicated process, but you do need to complete each step correctly. Let’s get started and discuss what those steps are for electing S corp taxation.
What Are the Options for LLC Taxation?
As we mentioned briefly in the introduction, there are three different ways to tax an LLC. By far the most common option is the default method of taxing an LLC like a sole proprietorship or general partnership, which is the “pass-through” method. Instead of the business itself paying any taxes, any profits are passed through the business entity itself, and taxes on those profits are paid on each owner’s personal tax return.
It’s important to note that this form of taxation also requires the LLC’s owners to pay self-employment taxes. This is a tax that covers both the employee and employer shares of Medicare and Social Security, and that rate is currently set at 15.3%.
Another option is to be taxed like a C corporation. With this form of taxation, the business does pay taxes on the corporate level at the rate of 21%. Then, when the company’s profits are paid out to shareholders in the form of dividends, those shareholders also pay taxes on those dividends. This is often referred to as “double taxation,” because the same money is technically taxed twice.
The biggest advantage of the C corp style is the fact that your LLC’s owners will not be subject to self-employment taxes. However, due to the double taxation model, the C corp is still typically a more expensive option than the default pass-through model.
This is especially true now that the Tax Cuts and Jobs Act of 2017 enacted a 20% business income deduction for members of pass-through entities. If you elect C corp taxation, you will lose this deduction and be required to pay taxes on 100% of the business income claimed on your personal tax return.
This brings us to the third option, which is the S corporation tax designation. This is another pass-through entity, and is therefore eligible for the 20% business income deduction we just discussed. In fact, the S corp taxation model is nearly identical to the default pass-through model, with the big benefit being that shareholders can be designated as employees, which can provide tax breaks by avoiding self-employment tax.
There are some restrictions for S corp style taxes though. Specifically, your business must not have more than 100 owners, and all of your owners must be United States residents. Furthermore, an S corp cannot have any business entities as co-owners, as every owner must be an individual person.
How Do I Elect S Corporation Taxation for My LLC?
If you want your LLC to be treated like an S corp for taxation purposes, you’ll need to file Form 2553 with the Internal Revenue Service. This document, which is titled “Election by a Small Business Corporation,” needs to be filed within 2 ½ months of the beginning of the tax year in which you want this election to take effect.
The information required for Form 2553 includes the name and physical location of your business, as well as your EIN (Employer Identification Number). You’ll also need to indicate which year you want the election to take effect in, and indicate who the IRS should contact if they need more information about your business (usually your LLC’s registered agent).
Then, you’ll need to give them the name and address of every person acting as a member/owner of your LLC at the time you want the election to take effect. Each of these individuals needs to sign and date the form, and you’ll also need their Social Security or federal tax ID numbers.
Once you’ve filled out and submitted this form to the IRS, they will notify you when they have either accepted or rejected your application for S corp taxation status.
Can I Hire a Service to File My S Corp Election for Me?
If you would rather hire a reputable business services company to file your S corporation tax election on your behalf, you do have some options. One of our favorite companies in this entire industry is Northwest Registered Agent, and they will file your S corp election for just $50 if you also use their business formation service to create your LLC.
Another option is to have IncFile prepare and file Form 2553 on your behalf. We’re also big fans of IncFile’s services, and wouldn’t hesitate to recommend them to any of our readers. With IncFile, prices for S corp tax election vary a bit from state to state, but in general it will cost you $50, the same rate Northwest charges for this service.
Check out our LLC service comparison review of IncFile vs Northwest Registered Agent for a closer look at which might be best for you.
Electing S corporation taxation for an LLC isn’t a particularly common option, but for some companies, it’s a great move. If your owners could benefit from avoiding both the C corporation’s double taxation and the LLC’s typical self-employment tax, the S corporation might be the right taxation model for you, as long as your business fits the S corp’s requirements.
While it isn’t all that difficult to apply for S corp tax status as an LLC, the process can be rather time-consuming.
If you don’t have the time, or if you would appreciate the peace of mind you’ll get from hiring a reputable company to handle this process on your behalf, you can contact IncFile or Northwest Registered Agent and they’ll take care of it for you. They are two of the best LegalZoom alternatives that offer great overall value.
We hope this article helped you enhance your understanding of getting your LLC taxed as an S corporation!