Can an LLC be taxed as an S corporation? Yes, provided you file the proper form with the Internal Revenue Service (IRS).
Types of LLCs
A member of an LLC is similar to a shareholder in a corporation. With respect to members, there are two types of limited liability companies (LLC):
1. Single-Member LLC. This is an LLC with only one member, who is the sole owner of the business.
2. Multi-Member LLC. This is an LLC with two or more members. Members can share equally in the profit or loss of the business, or can share in different proportions, as determined by the LLC operating agreement.
Electing the LLC tax-filing status
Both single-member LLCs and multi-member LLCs can elect to be treated by the IRS as either a C corporation or an S corporation. This election requires filing IRS Form 8832, Entity Classification Election, which must be done no later than two months and 15 days after the beginning of the LLC's tax year.
If you form a single-member LLC and do not file any special form with the IRS, the LLC will be taxed as what the IRS calls “an entity disregarded as separate from its owner," meaning it will be taxed as if it were a sole proprietorship.
If you form a multi-member LLC and do not file any special form with the IRS, the LLC will be taxed as if it were a partnership.
Regardless of whether you have a single-member or a multi-member LLC, you can choose to have it treated as an S corporation by filing IRS Form 2553, Election by a Small Business Corporation. If you file Form 2553, you do not need to file Form 8832, as you would for a C corporation.
How does a single-member LLC file taxes?
If your LLC is taxed like a sole proprietorship, you will report the LLC profit or loss on your individual Form 1040, along with either Schedule C, Profit or Loss From Business (Sole Proprietorship); Schedule E, Supplemental Income or Loss; or Schedule F, Profit or Loss From Farming, depending upon which schedule is appropriate for your type of business.
If you have elected to have your LLC taxed as an S corporation, the LLC will need to file Form 1120S, U.S. Income Tax Return for an S Corporation. The LLC itself pays no tax, but the profit or loss will be reported by you on your individual Form 1040, along with Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. You will need to pay taxes on any profit, regardless of whether the LLC actually passes it on you.
How does a multi-member LLC file taxes?
For a multi-member LLC taxed as a partnership, the LLC will file Form 1065, Return of Partnership Income, which shows the share of the profit or loss that is attributed to each LLC member. Each member then reports their share of the profit or loss on their individual Form 1040, along with Schedule K (1065), Partner's Share of Income, Deductions, Credits, etc.
If the multi-member LLC has elected to be taxed as an S corporation, the LLC itself will file Form 1120S, which shows the share of the profit or loss attributed to each member. The LLC itself pays no tax, but each member must report their share of the profit or loss on their individual Form 1040, along with Schedule K-1 (Form 1120S). Each member pays taxes on their share of profits, regardless of whether the LLC actually passes on the profits to the members.
For more information about S-corp status for your LLC, see IRS Publication 3402, Taxation of Limited Liability Companies.
