Do you sometimes wonder what if you had a choice to run your small business as an LLC, but get it taxed like an S Corporation?
Well, yes! You have that choice.
The IRS gives you an option to get the best of both worlds. You can choose your entity type as LLC with the easy compliance processes and lower compliance expenses, and yet receive the tax benefits of an S Corporation for your small business.
Establishing your business as LLC provides ease of operations similar to a sole proprietorship and general partnership with less compliance procedures, less number of formal meetings and lower compliance expenses, but with limited liabilities for LLC members just like it is in a corporation. The liability of each member is limited to their investment in the LLC.
How can an LLC choose to get taxed as an S Corporation?
As far as taxation is concerned, LLC does not have any existence. For taxation purpose, by default:
- LLC with one member is treated as a sole proprietorship
- LLC with multiple members is treated as a general partnership
This allows the LLCs to avoid double taxation and taxes are transferred to the members of LLC, just like it happens in a sole proprietorship or a general partnership. However, LLC members can choose their LLC to be taxed like a corporation. Once the LLC is approved to be treated like a corporation for taxation purposes, LLC members can elect S Corporation (rather than C Corporation) for tax treatment.
The major benefit of choosing LLC to be taxed like S Corporation is that unlike general partnership, S Corporation members that actively participate in the business are considered employees and not business owners. Hence, only their salary is taxed by the federal government, while the profit distribution is considered as dividends and hence not taxed. So, with proper tax planning, the tax liability and tax bills can be reduced to a great extent for LLC and its members.
Under specific circumstances, choosing S Corporation might also help LLC to receive the benefits of qualified business income under the reformed Tax Cuts and Jobs Act.
Please note that this whole description is a simplified version of extremely complicated taxation rules and laws. Expert professional advice is a must before making any decision. You may reach out to us at NileCPA for professional advice.