A limited liability company – or LLC – is a legal entity formed under state law to run a business. It provides many of the advantages of a corporation but is easier to form and operate. The way that business is subsequently taxed may need some explanation.
A multi-owner LLC is automatically taxed as a partnership by default, while LLCs with one owner are taxed like sole proprietorships. However, LLCs may choose to be taxed as a C corporation or S corporation. This is easily accomplished by filing a document called an election with the IRS. Once this is done, as far as the IRS is concerned, the LLC is the same as a corporation and it files the tax forms for that type of entity.
Choosing to be taxed as an S Corp can have distinct tax advantages
An S corporation is a pass-through entity, meaning that income and losses passes through the corporation to its owners’ personal tax returns. S corporations also report their income and deductions much like partnerships. An S corporation files an information return reporting the corporation’s income, deductions, profits, losses, and tax credits for the year.
Under an S Corp entity, the LLC would then need to set up a monthly payroll where the owner would need to be established as a legal employee and be paid separately from the LLC and require payroll taxes be submitted.
However, it is noteworthy that S Corp strategy does not apply if the business is categorized as a personal service business, such as accounting, law, health, consulting, athletics, financial services, and brokerage services. The pass-through deduction is not available for such businesses where the owner’s taxable income is over $415,000 for married or $207,500 for singles.
Is filing as an S Corp right for your business? Dunham Tax Professionals will help you sort it all out. Feel free schedule an appointment with us today.