LLC Electing S Corp

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 2,656 reviews

Jump to Section

Need help with an S Corp?

CREATE A FREE PROJECT POSTING
Post Project Now

Can an LLC Elect S Corp?

You may not know that as an LLC owner, you can elect to file as an S corporation via IRS form 2553.

An S corporation offers unique tax benefits from a limited liability company. Typically, S corp organizations have 100 or fewer shareholders and gives the business the usual benefits of incorporation with the freedom and tax benefits of an LLC.

An S corp is also known as S corp subchapter, and it is a different type of business structure than an LLC. When an LLC files taxes as an S corp through Form 2553, it may be able to obtain certain tax advantages that it wouldn’t normally qualify for.

Here is an article about S corporations and how they operate.

How Does an LLC Elect S Corp?

When deciding between filing as an LLC vs S Corp, it’s best to examine your personal tax liabilities and potential savings.

Both LLCs and S corporations are pass-through tax entities. This means that the businesses don’t pay taxes on the entity level like C corporations. Instead, the income tax passes through to the owner(s) of the entities, and they receive exclusive tax benefits for claiming as income as a business rather than an individual.

If you want to be taxed as an S corp, then you’ll have to meet certain criteria:

  • Your business must not have greater than 100 shareholders.
  • There may be no preferred shareholders among the owners.
  • The business must be formed in the United States and owned by individual U.S. citizens.

If you meet these criteria, then you can elect tax treatment as an S corporation. Here’s how:

  1. File a Form 8832 with the IRS. Form 8832 for Entity Class Selection allows you to be taxed as a C corporation.
  2. File Form 2553. When you file Form 2553, your corporation switches from the LLC and C corporation tax structure to the S corporation structure.

Not all LLCs are able to file as S corps and filing as an S corp can deter investors for business trying to raise capital funding.

You might also be audited more often by the IRS if you elect to file as an S corp. If you elect to become an S corp, you must also divide stock among shareholders. The S corporation’s stock can be preferred or common stock.

Here is an article with more details on an LLC vs S corporation and how to choose the right structure for your business’s taxes.

Should a Single Member LLC Elect S Corp?

A single member LLC owner can elect to file taxes as an S corp, and they may find that doing so carries several benefits. As an LLC owner, you automatically default to a sole proprietorship when paying taxes.

Sole proprietors are seen as self-employed; S corporation owners are not. As a S corp owner, you must show the IRS that you pay yourself a reasonable annual salary. Filing as an S corp can help you save money by avoiding hefty self-employment taxes, including Medicare payments and Social Security contributions.

However, because you’re an employee of the S corporation, you will have to prove that you pay yourself a salary and use the remaining business profit as a dividend to prevent being taxed twice.

A “reasonable” salary in S corporation terms will be relative to your business’s profitability. You are not able to claim all of your income as dividends to prevent paying self-employment taxes, even as a single member LLC.

You might consider using a 60/40 rule, in which you receive 40% of your business’s income as a salary, and the remaining 60% is filed as dividend. However, it’s best to consult with a tax expert and financial adviser before you file as an S corp or claim any income.

Here is an article on how to pay yourself reasonable compensation as an S corp.

Meet some lawyers on our platform

Tina R.

14 projects on CC
View Profile

Benjamin W.

40 projects on CC
View Profile

Jeremiah C.

37 projects on CC
View Profile

Namrita N.

13 projects on CC
View Profile

When Should an LLC Switch to S Corp?

An LLC should switch to an S corp when it becomes successful enough that its self-employed tax burden exceeds its burden as another type of corporation.

LLCs with more than one member default to a partnership, but under the S corp tax structure, all shareholders are regarded as employees. Therefore, personal tax liability as a self-employed business owner is lower.

An LLC might switch to an S corp when it wants to transfer assets and liabilities as a self-employed person to an employee-based model. This election by a small business corporation offers unique tax savings, and possibly lower tax burdens overall.

Here is an article about choosing the best time to switch to an S corp.

Does an LLC Electing S Corp Have Stock?

Yes, even a single member LLC has stock if it elects as an S corporation. An S corp only has one class of stock, and it operates the same way as membership interest in an LLC.

The IRS requires all S corps to issue both voting and non-voting stock, but they must all have the same rights to distribution and liquidation.

Keep in mind that any foreign ownership is strictly prohibited for S corporations; you will never be able to sell or trade stock to investors overseas, or anyone in the United States who does not have citizenship.

S corp stock does not allow for preferred investors with unique divided and distribution rights. While this many not affect your business, it’s important to know when attempting to attract investors in the future.

Here is an article with the official IRS web page about S corporation stock and debt.

Benefits of an LLC Electing S Corp

By electing to be an S corp for tax purposes, you can experience several benefits:

  • No self-employment taxes. For successful LLC owners, self-employment tax burdens can become a large expense. S corp owners are treated as employees, so you do not have to pay taxes as a self-employed individual.
  • Save money on tax liability. By filing as a salaried employee of your S corporation, you can pay less than you would as a self-employed individual. The same applies for all other shareholders of the LLC electing S corp.
  • Pay less Social Security and Medicare. Self-employed filers must contribute 12.4% Social Security and 2.9% in Medicare tax; employees filing as S corp members only pay 6.2% of Social Security and 1.45% of Medicare taxes.
  • Protect your assets. Creditors will not be able to pursue shareholders’ personal assets (such as homes, cars, and bank accounts) if they are employees of an S corp. Therefore, this model provides a greater level of personal protection than an LLC or general partnership.

Although maintaining an S corp filing status can be expensive, you do so in exchange for greater asset protection and lower personal tax liability.

That being said, filing as an S corporation as an LLC is a complex process. You should always consult with a tax attorney and financial expert before electing S corp on your taxes.

Here is an article with more information on the pros and cons of electing S corp.

Post a project in ContractsCounsel’s marketplace to receive flat fee bids from lawyers for your project. All lawyers have been vetted by our team and peer-reviewed by our customers for you to explore before hiring.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

View Keidi
Member Since:
August 25, 2021

Keidi C.

Principal Attorney
Free Consultation
Get Free Proposal
Boston, MA
24 Yrs Experience
Licensed in MA, NY
New England Law | Boston

Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting start ups, small and mid size businesses with their legal needs in the areas of corporate and securities law.

View Jim
Member Since:
August 13, 2021

Jim S.

Attorney
Free Consultation
Get Free Proposal
Florida
36 Yrs Experience
Licensed in NY
Notre Dame

Jim Slattery most recently served as General Counsel at Regional News Network, a large owner of broadcast television stations. Jim is an experienced attorney with broad-based expertise. He is a seasoned negotiator who has been involved in negotiations as complex as the Olympic Games. Jim spent 18 years as Vice President for Business and Legal Affairs at NBCUniversal. Previously, Jim worked in the media industry in various roles at All American Television. Jim’s success can be attributed to his ability to properly analyze data, manage projects, lead teams, develop creative solutions for complex problems, focus on strategically optimizing assets, manage/allocate risk and collaborate with divergent constituent groups to achieve objectives. Jim received a J.D. and a B.B.A. from the University of Notre Dame.

View Namrita
Member Since:
August 18, 2021

Namrita N.

Attorney at Law
Free Consultation
Get Free Proposal
Plano, TX
2 Yrs Experience
Licensed in MN, TX
Mitchell Hamline School of Law

Retired Dentist transitioned to Law, with a special interest in Commercial Real Estate, Startup businesses, Asset Purchase Agreements, and Employment Contracts. I love to help dentists and physicians with legal issues pertaining to licensing, credentialing, employment, and general business-legal questions.

View Jonathan
Member Since:
September 18, 2021

Jonathan H.

Owner
Free Consultation
Get Free Proposal
New York
10 Yrs Experience
Licensed in NY
Pace Law School

I’m an attorney focusing my practice on concierge corporate and intellectual property law for startups and high-growth companies. I also serve as outside General Counsel to several businesses in various sectors. Since founding my practice I've worked with hundreds of clients across a variety of industries. My experience as a former General Counsel of a premier edtech company gives me unique insight into the challenges my clients face and how to resolve them efficiently and cost-effectively.

View George
Member Since:
August 18, 2021

George F.

Attorney
Free Consultation
Get Free Proposal
Astoria, NY
21 Yrs Experience
Licensed in NY
Fordham University School of Law

The Law Office of George K. Fuiaxis, from the very beginning in 2002, has built a reputation with its clients as an unmatched, diligent, hands on law practice that is always on duty to find the best course of action for its clients. With a supreme pledge of exceptional service to its clients in the areas of Real Estate (Commercial & Residential), Loan Modifications, Intellectual Property, Corporate Law & Business Transactions, Wills, Trusts & Estates, the Law Office of George K. Fuiaxis creates solutions for the many faceted problems faced by its clients. The office represents several various clients, including well known lending institutions, foreign and domestic corporations, sellers and buyers of residential and commercial real estate, residential and commercial landlords and tenants, well known restaurant and business owners, automobile dealerships, airline companies, well known fashion, sports and entertainment industry individuals and corporations, information technology (IT) startups and well known IT companies.

View Chris
Member Since:
August 22, 2021

Chris J.

Outside Counsel
Free Consultation
Get Free Proposal
Irvine, CA
27 Yrs Experience
Licensed in CA
Loyola Law School, Los Angeles

I'm a business law generalist with over 24 years of experience, including as in-house General Counsel, as outside counsel through my own firm and as an attorney in an Am Law 100 law firm. My employers and clients uniformly appreciate my ability to (i) negotiate and close transactions quickly and effectively, and (ii) to make the complex simple. Among other things, I can efficiently assist you on entity formation, governance, and structure; HR issues; mergers and acquisitions; and the negotiation and drafting of all types of commercial contracts. I'm the proud recipient of multiple Martindale-Hubbell Client Distinction Awards given only to the top 5% of attorneys for quality of service.

View Gregory
Member Since:
August 23, 2021

Gregory W.

Business Attorney
Free Consultation
Get Free Proposal
Los Angeles
15 Yrs Experience
Licensed in CA
University of West Los Angeles

Strategic thinking business minded Outside General Counsel here to help you with your company. I have been able to help guide business owners from startup through series A, B, & C funding and ultimately IPO's. Regardless of your plans I am here to help you succeed as you grow your business.

View Michael
Member Since:
February 14, 2022

Michael O.

Managing Attorney
Free Consultation
Get Free Proposal
Los Angeles
15 Yrs Experience
Licensed in CA, NY
University of Southern California

A corporate and commercial attorney with experience in transactional legal services including corporate and finance transactions, mergers and acquisitions, real estate, commercial contracts, bankruptcy, restructuring, international business transactions and general counsel services. Additional background skills and experience include investment banking, financial analysis, and commercial litigation. Sectors covered include technology, media, franchises, and business services providers, from start-ups to medium and large enterprises.

View Daliah
Member Since:
September 1, 2021

Daliah S.

Principal Attorney
Free Consultation
Get Free Proposal
Chicago, IL
18 Yrs Experience
Licensed in IL
University of Illinois College of Law

Daliah Saper operates a cutting-edge internet and social media law practice that regularly leads local and national media outlets to solicit her commentary on emerging internet law issues involving cyberbullying, sexting, catfishing, revenge porn, anonymous online defamation, domain name and user-name squatting, privacy, and the latest business decisions made by social media platforms such as Facebook, Twitter and YouTube. As a litigator Daliah represents companies bringing or defending business and intellectual property disputes. (She has argued cases in a number of jurisdictions including taking a case all the way to the Illinois Supreme Court.) As a transactional lawyer she helps clients choose the right business entity, drafts contracts and licensing agreements, advises on sweepstakes and contest rules, and ensures website terms of use and privacy policies are compliant, and provides comprehensive trademark and copyright counseling. Since founding Saper Law Offices in 2005, Daliah has been named a 40 Under 40 by Law Bulletin Publishing Co., a top Media & Advertising attorney by Super Lawyers Magazine 14 years in a row, and has been repeatedly recognized as a leading media and entertainment lawyer by Chambers and Partners. For the past eleven years, she also has taught entertainment and social media law at Loyola University Chicago School of Law.

View Alex
Member Since:
August 26, 2021

Alex M.

Attorney
Free Consultation
Get Free Proposal
Los Angeles, California
11 Yrs Experience
Licensed in CA
Southwestern Law School

Mr. Mehdipour attended the University of California San Diego where he received his degree in political science. After graduating from UCSD, Mr. Mehdipour attended Southwestern University School of Law where he received his JD. Upon passing the bar, Mr. Mehdipour gained invaluable experience both in a law firm and business setting. Mr. Mehdipour uses his prior business and legal experiences to negotiate the most advantageous results for his clients.

View Alen
Member Since:
August 26, 2021

Alen A.

Attorney
Free Consultation
Get Free Proposal
Los Angeles, CA
15 Yrs Experience
Licensed in CA
University of West Los Angeles

Alen Aydinian is a versatile attorney with over a decade of experience working with business owners and real estate professionals. Client engagement is central to a successful attorney/client relationship. Alen personally manages all client relationships so that his clients can see how their interests are being served at every stage of the process.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call