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LLC Taxed As An S-CorporationPerhaps the biggest benefit of a limited liability company is its flexibility. For instance, are you aware that an LLC can be taxed as an S-Corporation? The LLC has been with us since the late 1970s when Wyoming originally legislated it into existence in the United States. The only problem was the LLC had never been seen before on the federal level. This raised the rather harrowing question of how it would be taxed. The IRS, being what it was at the time, came up with an insanely complex method for determining the taxation on revenue from an LLC. The answer was so complex that entire 500 page tax guides were written on it and attorneys such as yours truly lost many hairs from their head trying to figure them out. Things eventually became so confusing that not even the IRS could apply the rules correctly to every situation. Given this, it did a funny thing. The IRS threw up its hands and went to a check the box system. What is the LLC check the box system? It is exactly what it sounds like. When you form an LLC, you must designate how you wish it taxed by the IRS. This is done by filling out a form and “checking the box”. The choices are as a partnership or corporation, but there are two off the menu selections as well. The first off the menu situation is the single member LLC situation. Let’s take a look. The single member LLC is a problematic business entity for tax purpose. The favored tax designation with an LLC is as a partnership. A partnership is two or more parties doing business. Since there is only one person in a Single Member LLC, the IRS rejects the partnership filing and declares the LLC shall be taxed as a sole proprietor. Being taxed as a sole proprietor is just about the worst way to go. So, how do you fix this problem? Well, you can add a partner to the LLC so that you have two people. Alternatively, you can file to be taxed as a corporation instead of a partnership. Once you do that, you can then take the S-Corporation election. Now you end up being a single member LLC that is taxed as an S-Corporation. This gives you the power of being the only owner without the tax penalty of being declared a sole proprietor. Can an LLC be taxed as an S-Corporation? Absolutely. In fact, it is one of the best choices out there when faced with the single member LLC problem. ******************************** The above discussion is intended to be a general commentary on legal issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship. If you have additional questions, please contact me. |
