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What is an S Corporation LLC?

House Market Solutions Real Estate Investors What is an S Corporation LLC?

what is an s corporation llc

What is an S Corporation LLC? Many business owners understand and seek the benefits of setting up an LLC for relative ease of maintenance and corporate veil protection.

However, for business shareholders and owners who attempt to understand the tax benefits of forming an S corporation and evaluate if filing their taxes as an S corporation makes sense, they first must be able to answer several questions…

What is a Corporation?

Corporations are taxed, by default, like C corporations. The C corporation status requires the entity itself is responsible for paying taxes independent of shareholder’s personal responsibility.  After distributions, the shareholders then pay taxes on any gains from their dividends, an effective double tax.

The best examples of C-Corp filings are companies like Apple or Google.  As an investor, you may own portions of these companies, but you aren’t personally responsible for paying their taxes on your 1040 filings. They will pay their own taxes independent of you receiving any dividends, which you will then claim as income each year.

An S corporation imputes the taxable income of the corporation to the shareholders, who divide the business income amongst themselves and claim it on their individual tax returns.

What is a Limited Liability Company?

Wikipedia reveals it best by stating that:

A limited liability company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.

What is an S Corporation LLC?

An S corporation LLC is a hybrid limited liability corporation that elects to file its taxes as an S corporation by applying IRS Form 2553, otherwise known as the Election By Small Business form.

Business owners must follow proper procedures for LLC incorporation before the IRS will authorize S corporation tax status.  Once submitted, the Internal Revenue Service will respond with a letter either approving or denying your application.

This entity makes sense for many small businesses, real estate agents, and investors; particularly when that company desires the corporate veil protections of an LLC combined with the tax benefits of an S-Corp.
 
An S corporation LLC works well for many active income businesses, i.e., those who realize gains in fewer than 12 months.  Active shareholders of an S corporation LLC can save significant amounts of money in self-employment taxes by paying themselves a reasonable salary, then classifying the remainder of their income as a shareholder distribution.

How much do I pay in self-employment taxes as a business owner?

Taxfoundation.org shows us that
The largest of these social insurance taxes are the two federal payroll taxes, which show up as FICA and MEDFICA on your pay stub. The first is a 12.4 percent tax to fund Social Security, and the second is a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of payroll taxes (7.65 percent) are remitted directly by employers, while the other half (7.65 percent) are taken out of workers’ paychecks.
Active income LLC and Sole Proprietor business owners are paying 15.3% payroll taxes on ALL of their income. Before Income Taxes!
what is an s corporation llc

Do you understand what that last part means for your company in terms of dollars saved in taxes?

What if your CPA determines that your “reasonable salary” is only 30% of your income or less?  Through an LLC,  or worse, a 1099 Sole Proprietorship, you’ve been paying 100% of payroll taxes.  Considering company sales of $200k per year…the “company” being YOU…would you rather pay 15.3% on $200k of income or Payroll taxes on $60k of income?  How much would that difference save you?  Now, do you want to know what is an S corporation LLC?
Note that for long-term passive income investors, like landlords and developers, this entity structure may not provide optimal tax advantages. Do your due diligence and consult with a corporate attorney and a tax strategist CPA before implementing anything discussed in this article.  We are not licensed to give any legal or tax advice.

How to form an S Corporation LLC:

A business owner can incorporate an LLC before deciding to declare S corporation status. The procedure to form an LLC is straightforward.

  1. Become familiar with the regulations in the jurisdiction where you plan to conduct business.
  2. Choose a business name that complies with these regulations.
  3. Hire an attorney to create and guide you through the…
  4. Formal paperwork commonly called the Articles of Incorporation, which you must pay along with the mandated fees.
  5. An LLC operating agreement, which spells out the LLC members’ rights and responsibilities, must also be created for the LLC to be valid.

Some states require a notice of intent.  All LLCs must obtain any required licenses and permits.

In order to qualify for S corporation status, Form 2553 must be filed by the 16th day of the third month of the corporation’s tax year, or the 15th day of the second month if the tax year is 2 1/2 months or less. Early birds can file Form 2553 at any point during the prior tax year.

What if you miss the Form 2553 deadline?

All is not lost if you follow the IRS’s special rules for making late S corporation elections. To qualify, the corporation must file Form 2553 as soon after the deadline as possible and write, “Filed Pursuant to Rev. Proc. 2013-30,” at the top. A detailed statement must be attached.

This statement must explain why the corporation failed to meet the deadline and demonstrate that it was for legitimate cause or because the deadline was inadvertently missed. Each shareholder must sign the statement.

Bottom line

If you came here wondering, What is an S corporation LLC then now you know that S corporation status offers significant potential tax savings to LLCs.

Shareholders should analyze their best potential tax status well before the Form 2253 deadline.

It is always advisable to consult with a tax professional who can determine the best filing status and handle any requirements.

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