Small business owners who want to benefit from limited liability protection and avoid the formalities of a corporation frequently choose the single-member limited liability company (LLC) as their business structure. A single-member LLC is treated as a disregarded entity by default, which means that the IRS does not view it as a distinct tax entity and that all earnings and losses are reported on the owner’s personal tax return. However, under specific circumstances, a single-member LLC may decide to be taxed as a S corporation (S corp).
A single-member LLC must first satisfy the requirements for S corp status in order to be eligible for S corp election. It must be a domestic corporation, have no more than 100 shareholders, only one class of stock, and only allowed stockholders (individuals, certain trusts, and estates; no partnerships, corporations, or nonresident alien shareholders). The single-member LLC may elect S corp status by submitting Form 2553 to the IRS if it satisfies these conditions.
However, while choosing S corp status for a single-member LLC, there are several restrictions and things to take into account. Even if the LLC is not profitable, the owner must first pay themself a fair compensation that is subject to payroll taxes. The reason for this is that by classifying owners’ salaries as distributions, the IRS hopes to stop them from evading payroll taxes. Second, the owner is required to adhere to all corporate formalities, including convening annual meetings, enacting bylaws, and maintaining minutes. Third, unlike if they were a lone proprietor, the owner might not be able to write off some costs, like health insurance premiums. Is it possible for a business to make a S election mid-year? is another similar query. The answer is yes, however the election must to be made before March 15 of the election’s intended year of implementation. If not, the S election will take effect for the subsequent year. Additionally, at the time of the election, the company must be eligible for S corp status.
An S corp can require more time to start up than a single-member LLC. This is so that a S corp can be created, which necessitates submitting articles of incorporation and paying a fee, in accordance with state legislation. The corporation must next submit Form 2553 to the IRS in order to request S corp status. The application may be processed by the IRS for up to 60 days. In comparison, establishing a single-member LLC is typically easier and quicker as it only takes submitting the necessary paperwork to the state (the articles of incorporation).
Finally, if a S corp anticipates owing more than $1,000 in taxes for the year, it is required to pay anticipated quarterly taxes, just like any other corporation or LLC. Penalties and interest may apply if projected tax payments are not made on time. The S corp may not be required to file quarterly taxes, though, if it has no income or owes less than $1,000 in taxes for the entire year.
In conclusion, if a single-member LLC satisfies the eligibility requirements and adheres to the formalities and restrictions of S corp status, it may elect to be taxed as a S corp. The owner must, however, balance the advantages and disadvantages of S corp status with the easier and less expensive default tax treatment of a single-member LLC. The owner must also be informed of the S corp status’s associated payroll tax requirements, formalities, and deduction restrictions.
A single-member LLC can choose to be taxed as a S corporation in some circumstances. To ensure proper compliance with all rules, it is advised to speak with a tax expert. There are particular conditions and deadlines that must be followed in order to do so.