The LLC business structure provides multiple tax options, including taxation as an S corporation.
Ready to start your business? Plans start at $0 + filing fees.
updated November 21, 2023 · 8min read
Limited liability companies (LLCs) provide unmatched versatility and liability protection, and the Internal Revenue Service (IRS) allows LLC owners to pay their taxes as a different business structure. For many LLCs, filing taxes as an S corp. is the best option.
You can switch to S corp. tax status in a few simple steps. We'll break down all your LLC tax options and explain how to file your LLC taxes as an S corp.
You can change how to files taxes at any point after forming your LLC. An LLC can file taxes as a sole proprietorship, a partnership, a C corporation, or an S corporation. We'll break down each IRS tax classification by category:
Regardless of how the LLC files taxes, each member will be responsible for paying quarterly estimated taxes and any required self-employment tax.
Because LLCs don't have their own tax status, the IRS will assign a default classification to each business. If you do not file any special forms with the IRS to change your tax classification, your LLC will file taxes as either:
The best tax classification for your LLC depends on your business size, long-term goals, and industry, as all tax statuses have unique advantages and limitations. Learning the best way to file taxes for your LLC can dramatically improve its finances.
Sole proprietorships and partnerships often work well for small businesses. These structures keep control in fewer hands and simplify tax filing. On the other hand, finding investors becomes much more difficult. For many LLCs, S corporations provide a happy medium between retaining control and finding investors.
Larger businesses trend toward filing as corporations. While corporations introduce more requirements to stay compliant, they grow more quickly. C corporations can issue multiple classes of stock and accept investments from other businesses. S corporations restrict who can invest in your company but offer pass-through taxation.
LLC owners have to consider multiple factors when picking a tax status. Members need to consider:
While all tax statuses offer advantages, LLCs that file as an S corp. get some of the best benefits. The LLC-to- corp. pipeline offers key benefits:
Members need to know that an LLC electing S corp. status comes with a few considerations:
Income from an LLC is taxed based on its assigned or chosen tax classification. Once you've settled on your tax status, you still need to file with the IRS. We'll outline possible tax scenarios and the proper forms to file for each:
The LLC will file Form 1120S. Each member needs to report their share of the profits on their individual Form 1040, along with Schedule K-1 (Form 1120S).
The LLC will file Form 1120. This form covers the corporate tax rate on company profits. If any shares of the profits pass on to the owners, each member will report their share on Form 1040. They must also file with Schedule B, Interest and Ordinary Dividends.
The LLC will file IRS Form 1065, U.S. Return of Partnership Income, showing each member's share of the profit or loss. Each member will report their share of the profits or losses on their individual Form 1040, along with Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
You will report the income and expenses of the business on your individual Form 1040, along with Schedule C, Profit or Loss From Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, or Schedule F, Profit or Loss From Farming.
Note: Sole proprietors and partnerships have more flexibility in filing with their tax ID. Corporations must file with an employer identification number (EIN). Partnerships and proprietors can file with an EIN or Social Security Number (SSN)
If you want your LLC to be taxed as an S corp., you need to file IRS Form 2553, Election by a Small Business Corporation.
If you file Form 2553, you do not need to file Form 8832, Entity Classification Election, as you would for a C corp. You may use online tax filing or file by fax or mail.
Note: For business owners asking if an LLC can be an S corp., the answer is yes. While filing as an S corp. offers tax advantages, some owners want the structure of an S corp. as well. To decide if that's the best strategy, consult a tax attorney and your registered agent.
From a tax savings perspective, LLCs should convert to S corporations when their self-employment tax exceeds the tax burden of filing as an S corp. Most LLCs will hit this point when their net income reaches $40,000. But in some cases, this can occur as low as $25,000.
Other factors to consider include:
LLCs enjoy advantages no other business can structure can reach. They let owners combine tax savings with a streamlined business structure. By running an LLC taxed as an S corp., you'll balance careful management with unbeatable tax benefits.
When electing S corp. status for LLCs at the right time, you'll enable long-term growth and savings for the members who helped get your business off the ground. By weighing the pros and cons of this choice and filing the proper paperwork, you can set your LLC up for long-term success.
by Siege Media, contributor to LegalZoom
'Inc.' in a company name means the business is incorporated, but what does that entail, exactly? Here's everything you need to know about incorporating your business.
November 21, 2023 · 10min read
By knowing what other trademarks are out there, you will understand if there is room for the mark that you want to protect. It is better to find out early, so you can find a mark that will be easier to protect.
November 21, 2023 · 4min read
It's easy to create a new LLC by filing paperwork with the state. But to set yourself up for success, you'll also need to think about your business name, finances, an operating agreement, and licenses and permits. Here's a step-by-step guide.
November 21, 2023 · 21min read