LLC to S Corporation Election

Saving money on self-employment taxes is one of the main reasons for choosing S corporation taxation.

A limited liability company (LLC) is a type of business structure used by a lot of small firms. LLCs offer more managerial flexibility and less legal constraints than corporations.

The default LLC tax arrangement is also straightforward. Multi-owner LLCs are taxed like partnerships, while single-owner LLCs are taxed like sole proprietorships. Members of the LLC pay self-employment taxes and declare business earnings and expenses on their personal tax returns.

Even if it only has one owner, an LLC might elect to be taxed as a S corporation. Your business structure will not be converted from an LLC to a corporation if you choose S corp. taxation. It simply alters how you file and pay taxes, as well as how you treat owner income. Switching to a S corporation may make sense if the financial advantages outweigh the costs.

If an LLC is taxed as a sole proprietorship or partnership, the owners are considered self-employed and must pay Social Security and Medicare taxes on all business profits up to the federal maximum.

The owners of an LLC that is taxed as a S corporation can be firm employees. They must pay themselves a fair wage for the labor they perform. On that wage, they will pay Medicare and Social Security taxes, but not on any further corporate profits.

Owners of S corporations may be allowed to contribute more to tax-deferred retirement plans than they would otherwise be able to. However, converting to a S corporation might result in additional paperwork and costs, especially if you have a lot of assets.

An LLC cannot adopt S corporation taxation unless it meets IRS ownership and organization standards. An S corporation is required by IRS regulations to:

Be a company based in the United States.

Have a maximum of 100 shareholders (owners). Individuals, trusts, and estates can all be shareholders. Corporations, partnerships, and non-resident aliens are not permitted to be shareholders.

There should only be one type of stock.

Within two months and 15 days of the start of the business's first tax year, newly created LLCs can elect to be taxed as a S corporation by filing an election.

Form 2553 Election by a Small Business Corporation, is required by March 15 of the year, to make an LLC to S corp. election with the IRS. The form must be signed by shareholders as well as a company officer.

General Relief Rules for S Corporation Elections

The following requirements must be met to qualify for late S corporation election relief by a corporation or entity classified as a corporation:

    The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely;

    The entity has reasonable cause for its failure to make the election timely;

    The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years; and

    Less than 3 years and 75 days have passed since the effective date of the election (See the Exception to the 3 Years and 75 Day Rule section below).

In addition, if the electing entity is requesting a late corporate classification election to be effective on the same date that the S corporation election was intended to be effective, the requesting entity must also meet the following additional requirements:

    The entity is an eligible entity as defined in Treas. Reg. § 301.7701-3(a);

    The entity failed to qualify as a corporation solely because Form 8832 was not timely filed; and

    The entity timely filed all required federal tax returns consistent with its requested classification as an S corporation.

If the entity qualifies and files timely in accordance with Rev. Proc. 2013-30, the Campus can grant late election relief.  If the entity does not qualify under the provisions of the Revenue Procedure, its only recourse is to request a private letter ruling.


No comments:

Post a Comment