Due to their flexibility and simplicity of establishment, Limited Liability Companies (LLCs) are a popular choice for small businesses. However, LLCs have the option to elect S Corporation taxation, which can offer significant tax advantages. After the event, LLCs can discover that they should have chosen to be taxed as a S Corp. The question that arises is whether an LLC can thereafter file as a S Corp.
No, an LLC cannot retrospectively file as a S Corp, to make a long story short. The election must be made by the 15th day of the third month following the end of the tax year in order for it to be valid for that year. For instance, the election would have had to be made by March 15, 2021, for the tax year 2021. If the LLC misses the deadline, they still have time to make the choice for upcoming tax years.
Regarding this, the IRS does not offer a web-based tool to determine whether an LLC has chosen to be taxed as a S Corp. The Form 2553, which is the form used to make the election, must be found in the LLC’s tax filings in order to verify the choice. The LLC is treated as a S Corp for tax purposes if the Form 2553 was submitted and accepted by the IRS.
You should check your tax records for the Form 2553 to see if your LLC qualifies as a S Corp. If the paperwork is missing, your LLC is not a S Corp and is taxed as a partnership or a disregarded company, depending on how many members it has.
The penalty is $195 for each month or portion of a month that the election is late, up to a maximum of 12 months, if an LLC misses the deadline to file as a S Corp. However, if the LLC can provide a valid explanation for the late submission, the fine can be waived.
In conclusion, an LLC may elect to file as a S Corp in future tax years but cannot do so retroactively. Only by looking at the tax returns for the Form 2553 can you determine whether an LLC has chosen to be taxed as a S Corp. If an LLC misses the deadline, they may incur late filing fees; but, if they can provide a good reason, the fees may be avoided. To make the greatest choice for their company, small business owners must think about the tax ramifications and speak with a tax expert.
The response to the query “Which is preferable, an LLC or a sole proprietorship?”