Due to their adaptable structure and limited liability protection, limited liability companies (LLCs) have grown to be a popular alternative for small enterprises and entrepreneurs. Pass-through taxes, which permits corporate revenues and losses to be reported on the owner’s personal tax return, is one of the main advantages of an LLC. However, if an LLC satisfies certain IRS conditions, it may alternatively elect to be taxed as a S Corporation (S Corp).
So, is it possible for a single-member LLC to choose to be taxed as a S Corp? The answer is yes, but a few requirements must be satisfied. The LLC must first be designated as a domestic LLC. Second, it must only consist of one person (thus, “single member”). Third, the member must be a citizen or resident alien of the United States. In order to elect S Corp status, the LLC must finally submit Form 2553, Election by a Small Business Corporation, to the IRS.
Remember that LLCs with multiple members cannot choose S Corp status. A multi-member LLC or a partnership must be used to file on their behalf. The LLC must also satisfy the IRS’s eligibility standards for S Corp status, which include not having more than 100 shareholders, issuing just one class of stock, and adhering to specific ownership and distribution guidelines.
Certain tax laws and regulations will apply to an LLC after it elects S Corp status. The company will submit a Form 1120S yearly tax return, which details the company’s earnings, credits, and deductions. Profits and losses are passed through to the shareholders, who report them on their personal tax returns rather than the S Corp itself paying taxes on its earnings.
Do you have to submit Form 2553 each year now? No, only one filing is required to choose S Corp status. However, the LLC must adhere to continuous S Corp standards, such as submitting yearly tax reports, keeping precise records, and paying any owner-employees appropriate salaries.
So how can a single-member LLC choose to become a S Corp? The procedure is rather easy to follow. The LLC must first fulfill the conditions for S Corp eligibility. Once the tax year has begun, usually within 75 days, the member must submit Form 2553 to the IRS. The member and all other shareholders (if any) must sign the form. The LLC will be classified as a S Corp for tax purposes as soon as the IRS confirms the election.
What is the consequence of registering a S Corp late, finally? The cost of filing Form 1120S after the deadline can be high. The fine is determined by multiplying the S Corp’s total number of shareholders by $195 each month or fraction of a month (up to 12 months). For instance, if a single-member LLC failed to register by the filing deadline of March 15 and chose the S Corp status, they would be subject to a penalty of $1,950 ($195 x 10 shareholders) if they submitted by the filing deadline of April 15.
In conclusion, single member LLCs that meet the necessary criteria and submit Form 2553 to the IRS may elect to be taxed as S Corps. S Corp status can offer tax advantages and flexibility for small enterprises, even while there are continuous requirements and potential fines for late reporting. As always, before making any decisions on the tax structure of your company, you should speak with a tax expert.
A taxpayer may choose to alter the accounting period for a partnership or a limited liability company (LLC) that is subject to partnership tax by making a Section 444 election. The partnership or LLC might choose to adjust its tax year to coincide with that of its owner(s) by submitting Form 8716 to the IRS. The alignment of the tax years of the LLC and its owner can be beneficial for a single member LLC that has chosen to be taxed as a S corporation.