Should Your LLC Elect S Corp Status?

Should Your LLC Elect S Corp Status?

Should you choose an S Corp election or opt for the LLC (Limited Liability Company)? These are two of the most popular legal structures for small businesses, and many small business owners have struggled over which is best for them.

However, you may not realize it doesn’t have to be LLC or S Corp, because the two aren’t mutually exclusive. It’s possible to have your cake and eat it too by forming an LLC and then electing S corporation status.

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This is a particularly sound strategy if you have an LLC and the payroll taxes (self-employment taxes) on the owner(s) are high. Here we’ll break down some of the key details on why you should consider an LLC with S corporation election, and how you go about doing it.

An Intro to the LLC and S Corporation: Key Differences

Both the LLC and S corporation are well liked among accountants and small businesses because of their “pass-through” tax treatment. Unlike a regular C corporation, both of these structures do not pay taxes on the business’s profits. Rather, profits are passed along to the owner(s) and reported on their individual tax returns. In addition, both structures also help to separate the owners from the business and provide liability protection.

But there are some key differences as well. An LLC is typically much easier to run from an administrative standpoint. There are fewer state filings and forms, lower start-up costs, fewer formal meetings and documentation than with the C or S corporation. That’s usually a big advantage for small business owners who don’t want to be burdened by paperwork.

In addition, the LLC offers more flexibility in how owners can allocate the percentage of profits and losses among the owners. Let’s say you started a business with a friend and you each own 50% of the business. One year, your friend had something come up in his personal life and didn’t spend as much time on the business as you did. You both decided that the fair thing to do would be to give you 75% of the profits for the year.

However, if you had formed an S corporation, you would both still be taxed based on the percentage of ownership (i.e. you would be taxed on 50% of the profits; your partner on 50%…even though you had your own arrangement). However, the LLC does give you the flexibility to determine how you want to allocate the business’ profits and each owner will be taxed accordingly.

It may sound like the LLC is coming out miles ahead, but there’s one key advantage of the S corporation, and that’s with taxes. The S corporation gives you more flexibility in how earnings are paid to the owners. For example, with an LLC, the entire net earnings are passed along to the owner(s) in the form of self-employment income and are, therefore, subject to self-employment tax for social security and Medicare.

But with the S corporation, you have the option of dividing up earnings into wages/salaries and then passive income in the form of distributions. Only the wages/salaries are subject to the FICA tax for social security and Medicare. The distributions are not. However, keep in mind, as an owner working in the business, you have to pay yourself a reasonable salary for the job you do.

Don’t think you can get away with giving yourself a $20,000 annual salary and taking $150,000 in distributions.

Combining the LLC and S Corporation

Now, the interesting twist is that you can set up your business as an LLC and then make the election to have it treated as an S corporation by the IRS. From a legal perspective, your company is an LLC, not a corporation. That means you still get all the advantages of the LLC in terms of fewer filings with the state, as well as less paperwork and lower costs all around.

But then, in the IRS’s eyes, your business is an S corporation. You get the pass-through of income just like a sole proprietorship or partnership, and you get the added flexibility of distributing some of the company’s income as distributions not salary.

Therefore, potentially saving on social security/Medicare (i.e. SECA/FICA) taxes.

S Corp Election

If you’re interested in electing S corporation tax treatment for your LLC, there are a few other things to keep in mind. There are certain restrictions for who can form an S Corporation.

For example, shareholders need to be legal residents of the U.S. and they need to be individuals (i.e. not partnerships or corporations).

To file for S corporation treatment, you’ll need to file Form 2553 with the IRS. It’s relatively simple paperwork, but there are strict deadlines for when it needs to be filed. A brand new company has 75 days from the date of its incorporation (or LLC formation) to file.

If you’ve got an existing LLC and want S corporation status, it’s too late for your 2018 taxes. But you can qualify for the 2019 tax year as long as you get your paperwork in by March 17.

Question Photo via Shutterstock

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Nellie Akalp Nellie Akalp is a passionate entrepreneur, recognized business expert and mother of four. She is the CEO of CorpNet, the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States.

24 Reactions
  1. I guess it would still depend on you and your experience in running a business. New business owners want to keep things easy. Usually, they don’t care about liabilities and care more about running the business at the soonest time possible. But then, it is nice to know what it is all about. Articles like these are always a great help.

  2. Provided you kept finances in accordance with requirements, Why can’t you make a late S corp election for TY 2013?

    • Hi John –

      Thanks for reading and commenting. As this is a tax question, I would recommend speaking with an accountant or a CPA. They would best be able to guide you in regards to this issue.

      Sorry I couldn’t have been more help!

  3. If I elect S status for my LLC doing have to run payroll and do withholding or can I just cut checks and issue 1099s at year end?

    • Hi Julie –

      Thank you for reading and commenting on my post!

      I would strongly recommend speaking with an accountant or CPA regarding this question, as tax requirements can vary.

      Sorry I couldn’t be of more help!

    • I would not recommend a 1099 and actually paying the stockholders a 1099 would be counter productive if the idea was to lower SE taxes, as any monies received as a 1099 misc income is subject to SE taxes (self employment) taxes. There are very strict rules on what is a contract labor and a wage. Not likely your employees would fall under the Contract labor guide lines.

  4. Nellie

    Thank you for your article. I enjoyed reading it and obtaining the information provided. I am a consultant, and have established an LLC for my practice. Its primarily for the liability protection. I am now establishing another LLC for real property jointly owned with my brother. I am weighing the alternatives carefully. If there is someone in our community I would appreciate hearing your perspective.
    We definitely need to secure a tax CPA for the expertise.

    Again thanks for your article.

    • Hi John,

      While I cannot offer tax or legal advice, my co CorpNet does assist with corporation/LLC filings and even offers free business consultations. Please feel free to reach out to Katie Hendrix in my office at 888-449-2638 x110 to chat further.


  5. Hi Nellie ,
    Is it true that if you are an LLC with S Corp status in California then you don’t have to pay the $800 LLC state tax for the first tax year?

    • Hi Gina,

      Great question. Unfortunately, no that’s not the case. The S-Corp status is only viewed by the IRS, not the State. In the State’s eyes the company is viewed simply as an LLC regardless and the tax is not waived. If you have any other questions, please feel free to contact Katie Hendrix in my office for a free business consultation at 888-449-2638 x110. Have a great day!

  6. HI Nellie,
    Just wanted to say thank you for writing this article – helped me with understanding why we should elect to be taxed as an S Corp. My question is, will there be a problem with sending form 2553 late? Our application for LLC Filing was marked with a date of 7/31/2015 but we did not officially start until 8/31/2015. Our CPA suggested we elect to be an S corp when filing only when we received a letter from CA Franchise Tax Board to send in $800 last 10/26/2015. When filling out the 2553 form, I put down 7/31/2015 as date of incorporation (Part 1 B) and 8/31/2015 under (Part 1 E.) I am really hoping that we are in compliance with the time frame. If not, are we completely shut out of not being able to file as an S corp? Looking forward to hearing from you.

  7. How exactly would an LLC with an S corp election pay themselves the salary? For instance, would I just write myself a check every 2 weeks from my company account for payroll? I have no clue how this works. It’s just me and no other people involved.

    And in Quicken, how I keep track of profit and expenses how would I write that in? Just call it Payroll?


    • Hi Josh,
      Thank you so much for reading and commenting. Unfortunately, since I am unable to provide any legal, tax or financial advice, I can’t peak to your specific situation. Additionally, I don’t generally deal with payroll, taxes or anything other than state compliance and filings. However, please give Milton in my office a call at (888) 449-2638 to get any general information we may be able to assist you with on this topic. Thanks again and we look forward to hearing from you!

  8. Hi, thanks for the article. We are an LLC in Nevada and are going to file as an S-corp. since we are an LLC with multiple managing members, do we need to also give ourselves corporate titles because of the S-corp filing?
    our current operating agreement / articles of incorporation has us noted as managing members

    • HI John:

      Thanks for reaching out and I am glad you found the article useful and informative. In response to your inquiry, an LLC which is electing to be an S Corp for tax purposes does not need to change the title of it managing members, although each managing member can hold title within the LLC as well. Typically members within an LLC have a member title and that is sufficient. I hope this clarifies your questions for you.

      • Hi Nellie,

        thanks for your response. i have one more question, we are filling a 2553 form and it is requesting the signature and title of an officer. not sure if we should put member. i would hate to throw a red flag with the IRS. there are 4 of us, do we need to create officer titles for this form or is member acceptable?

        Thanks again!

      • Hi John!

        Great question, the IRS basically needs one the members of the LLC as a main point of contact. So, generally speaking, you would want to place the name and contact number of whomever the partner is that manages all of the accounting and operational work for the LLC and you can list their title as LLC member. I hope this answers your question for you. Please feel free to reach out with any additional questions or if I can help with any of these filings for you 🙂

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