Discussion:Difference between LLC filing as S-corp and S-Corp

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Discussion Forum Index --> Tax Questions --> Difference between LLC filing as S-corp and S-Corp


DMW1040 (talk|edits) said:

8 November 2006
I am not familar with S-Corp's. What is the advantage between forming an LLC electing to file as an S-corp. or just electing S-corp status without first forming an LLC. Can a single memeber LLC elect to file as an S-Corp.

Jdugancpa (talk|edits) said:

8 November 2006
Yes, a SMLLC can elect S corp treatment. However, I think you need to find out tax advantages & disadvantages of each form before deciding whether or not to form an LLC.

Step one - figure out whether you want to be taxed like a sole proprietor or like an S corp.
Step two - form the legal entity based on your decision in Step one. If you want to be a corp, set up a corp. If you want to be a sole proprietor with some legal protection, form an LLC. There are lots of threads here already discussing taxation of S corps.

JR1 (talk|edits) said:

November 8, 2006
Agree with JD. The problem in the first choice is the lack of direction and certainty of many legal issues around the different form. Which controls? The LLC law or the Corp law? It isn't clear. I believe that if you want to be a corp, then incorporate. Then it is quite clear and easy to handle.

Hadlin (talk|edits) said:

8 November 2006
Just to make it a little clearer. An LLC is simply electing to be taxed as an S Corp. Therefore state laws about LLCs will prevail. A corp will be subject to laws written about Corporations.

However legality and case history aside. The tax effect of both should be identical. One circumstance where they are not identical is state fees and taxes. LLC may be subject to certain taxes that are not the same as if corp. However I can onlythink of an example as a partnership vs. LLC right now. For partnership CA fees are different then llc being taxed as partnership.

Taxnfp (talk|edits) said:

8 November 2006
One more thing to be concerned with is if a SMLLC elects to be taxed as an S-Corp, they open themselves up to salaries. Form 1120-S instructions for items F and G say that an LLC that elects to treated as a corporation for federal income tax purposes is not eligible to be an S Corporation shareholder. Therefore for federal income tax purposes the individual is a S-Corp shareholder subject to employment tax rules.

JR1 (talk|edits) said:

November 8, 2006
But Hadlin, taxes depend on the underlying legalities. We had a thread on the topic of how to handle rental issues between company and individual. And never could agree on how to handle it because the issues were contradictory...there are many others.

Bengoshi (talk|edits) said:

8 November 2006
One of the big attractions of LLCs is there's flexibility in allocating items of income, deductions, etc. So other than the self-employment tax issue, I don't get why a taxpayer would set up an LLC only be taxed under more rigid S-corp rules (unless there's some other non-tax benefits). Like some other folks noted, if you want to be taxed as an S-corp, you probably should form a corp. BTW, has anyone ever seen a situation where an LLC operating agreement potentially created two or more classes of stock where an S-election was made?

JR1 (talk|edits) said:

November 8, 2006
Excellent point, Bengoshi! Wow...considering the effects of that!

Biolex (talk|edits) said:

9 November 2006
An LLC can be taxed as a partnership or as a C corp. The defualt is partnership taxation, so one must "check the box" to elect corporate (C corp) treatment. A single member LLC seeking pass-thru treatment should file a 1040 Sched C, not an 1120S.

I would advise against not forming an LLC or corporation and electing to be taxed as an association taxable as a corporation because you will not be afforded any liability protection under the law.

Biolex (talk|edits) said:

9 November 2006
Adding to my comment above . . .

A single member LLC can own stock in a corporation electing S status. See PLR 9745017. But now you're talking about forming an LLC and a corporation.

PDXCPA (talk|edits) said:

9 November 2006
Biolex I respectfully disagree with some of your post unless I am misunderstanding your post. An SMLLC defaults to sched c and Multimember LLC defaults to Partnership. These defaults can be changed by filing 2553 to elect sub s status where an 1120s must be filed. Each state can be different when it comes to the laws of being Incorporated vs LLC. A state may require minutes for an Inc but may not require minutes for an LLC. States have made LLC creation/continuance easier than a standard Inc and STILL have the liability protection. Of course this liability protection varies again by state, hence, the reasoning for LLCing in Nevada under certain circumstances. IRS states that they do not necessarily recognize an LLC so existing tax laws under partnership, C Corp, S Corp and Sole Prop apply to the LLC. BTW you can file a 2553 (Sub S Election) with out filing 8832.

JR1 (talk|edits) said:

November 9, 2006
Yeah, I was torn between saying that or just letting the thread die. PDX is correct.

Jimm (talk|edits) said:

27 November 2006
Hi guys - I've spent numerous hours trying to understand this very issue but I am still lost. Our accountant and lawyer suggested forming an LLC electing S-Corp status. It is just two partners (a third is a non-US citizen and cannot own part of an S-Corp). My question is --- isn't an LLC already a pass-through to the owners? Why the "S-Copr election"?

PDXCPA (talk|edits) said:

27 November 2006
Multiple member LLC defaults to Partnership for tax purposes. Many difference between Partnership and S Corp.

Jdugancpa (talk|edits) said:

27 November 2006
Here's the deal. Atty's like LLC's because (they say) you have less administrative stuff that can go wrong causing your LLC to be disregarded and voiding your liability protection. However, businesses have been incorporating for years. Yes, "piercing the vale" is of concern, but it does not happen very often. It is not difficult to maintain a corporation. Set up a separate checking account, keep separate books, file corporate tax returns, keep minutes.

But before setting up an LLC, look at the taxation of operating your business as an LLC versus a corporation. In your case, because one of the owners will be a non-US citizen, the option of forming an S corporation is not open to you, because non-US citizens are not valid shareholders of an S corp. So you have two choices before you: taxation as a partnership (for which an LLC is a better option than a plain old partnership) or a c corporation. Assuming you have discussed and understand the difference between partnership taxatation and C corp taxation, go with the recommendation of your attorney and CPA, set up an LLC and have it taxed like a partnership.

For others reading this thread, however, the consensus of us frequent tax-almanacers is, if you want partnership taxation (or Schedule C taxation for a single-member LLC), set up an LLC, if you want corporate taxation, set up a corporation, not an LLC. The primary reason for having an LLC elect S corporation taxation is because the LLC was set up prior to thinking through how you really want the business to be taxed (or circumstances changed) and now, you already have the LLC set up, so an election can make it taxed like a corp. But it is not optimal, IMO.

DianeOffutt (talk|edits) said:

18 January 2007
I completely understand the tax consequences of LLC, versus C or S-Corp. My question is:

What is the legal name of a company you set up as an LLC, then elect S-Corp status....is it XYZ, LLC or XYZ, Corp?

I have a new client that after much discussion of the pros and cons of taxation has decided on LLC, then S-CORP.

Diane Offutt Woodstock, Georgia

LH2004 (talk|edits) said:

18 January 2007
Names are a matter of state law. State law doesn't care how the IRS decides to treat you -- they're completely independent.

State law typically says that an LLC has to have "LLC" or "limited liability company" in its name, so that's what you have to do with an LLC.

DianeOffutt (talk|edits) said:

18 January 2007
Thank you for your quick response.

Diane Offutt

Eriktax (talk|edits) said:

January 24, 2007
In responce to "BTW, has anyone ever seen a situation where an LLC operating agreement potentially created two or more classes of stock where an S-election was made?"

Yes, in fact, nearly all of the LLC deals I do would create a second clas of stock were the LLC to elect S corp status since almost invariably, I set up disporportinate allocations and distributions. Thus, I make sure my clients do not elect corproate status for an LLC unless we've gone through everything.

The risk here is greater than one might expect because, if the S corp loses its S corp status, it defualts to a C corp (i.e., it does not defualt back to a partnerhsip)

Rmary (talk|edits) said:

24 January 2007
My client was organized as an LLC in Nov. '06 and then I faxed form 2553 per what I thought were the instructions to form 8832. IRS came back and insisted that I mail both form 2553 and 8832 together to the Phila. center, which I then did with a cover letter. Still haven't heard back, but am assuming the S-corp election has been accepted. In retrospect, we should have just formed an S-corp, not an LLC trying to "check the box".

Daveytomsoni (talk|edits) said:

11 July 2007
Has anybody seen an LLC operating agreement adapted to an LLC that will elect to be taxed as an S corporation?

Blrgcpa (talk|edits) said:

12 July 2007
An agreement is usually drawn up by an atty. In NYS there is an llc fee/member with a mininum = to 5 members, I believe. There is no tax on the s corp, so why would an llc with a fewer members want to be an llc? You get protection by being a corp. The IRS does not recognize llc, thus they must chose how to be taxed.

KatieJ (talk|edits) said:

13 July 2007
Some attorneys, in "charging order" states, may recommend using an LLC taxed a as an S corp in preference to a corporation with an S election, for liability protection reasons.

Be sure to get good legal AND tax advice before making a choice.


Iaklein (talk|edits) said:

5 March 2008
Can you help with this one.....NY S-Corp starts doign business in NJ....no election for S-Corp in NJ...taxpayer is a carpenter with about 20k of income in NJ...the Work Comp is around 3500...if I make entity an LLC, there is no requirement for work comp as the owner is only employee....what would be the tax ramification of switching to a Single Member LLC?

Thank you.

Jdugancpa (talk|edits) said:

5 March 2008
Can't help you with NY/NJ state tax issues, I'm on the west coast. From a federal tax perspective, changing from an S corp to a SMLLC treated for tax purposes as a proprietorship will involve a taxable liquidation of the S corp. Whether the taxable liquidation results in actual tax owing depends upon what is in the corp and the relative FMV vs Tax Basis of the assets & liabilities.

Iaklein (talk|edits) said:

5 March 2008
So the client will get hit with somewhat of a tax bill for liquidation...and that cost will be offset by me having to reduce the fee from the cost
of doing a corporate tax return to a Schedule C  :0)

Dsocpa (talk|edits) said:

11 April 2008
Doesn't the self-employment tax - or ability to reduce it come into the equation here in favor of the S-Corp vs. Sch C or partnership?

KatieJ (talk|edits) said:

11 April 2008
Yes, that's one of the considerations. However, it is possible (we think <G>) to bifurcate LLC interests for SE tax purposes and get the same result. See the discussion at Discussion:LLC,_SE_Tax,_and_Bifurcation_of_Income.
  • Questions from non-pros, and the related responses, have been moved here.
  • Here is one related post from Jdugan that follows along the lines of what he posted above, being moved here out of a consumerQ discussion:

Jdugancpa (talk|edits) said:

19 August 2006
I would recommend against an LLC electing corporate status. From a tax perspective, you need to look at the pros and cons of S status versus Schedule C. If you decide S status fits you best, set up a corp. If Sch C best, do the LLC. The pros and cons are:

S corp affords the opportunity of FICA savings by splitting remuneration between wages subject to FICA tax and S distributions (dividends) which are not subject to FICA taxes.
On the other hand, lowered wages from S corporation will put a lower limit on retirement contribution calculations, since dividends are not factored into the employee contribution base. Chalk this up as a benefit in favor of Sch C.
A further benefit of Sch C is lower administrative costs and hassles. As a Sch C owner with no employees other than yourself (am I understanding you correctly), your tax filing obligations will be limited to a 1040 (plus state income tax return, if req'd), plus any sales/excise tax returns possibly due at the state level. As an S corporation, add 4 quarterly Forms 941 (payroll taxes), an annual Form 940 (Federal Unemployment Tax) and W2/3. (Some states may also have filing requirements for a single-member LLC, I don't know - my state does not.) Possibly more if state unemployment and/or state industrial insurance comes into play (in WA, officers may elect to be exempt from both of these - I assume that is the case in most states, but don't know for sure).
If earnings before owner compensation goes much higher than about $125k, the FICA savings for operating as an S corp will likely diminish, assuming you pay yourself at least 50% of overall comp as wages, since the higher end compensation will save only medicare, not social security. You may wish to see a CPA or tax advisor in assisting you with this decision. That person will be able to quiz you and get a better feel for all of the issues pertinent to you to steer you in the right direction.

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