Why Elect S Corp Status for Your LLC?
Small business owners elect S corp status for their LLCs when it helps them save money on taxes.
Generally, if a small business can pay its owner(s) a reasonable salary and at least $20,000 in annual distributions, consistently (year over year), then electing S corp status could make sense. We'll cover this in more detail below.
When Should an LLC Elect S Corp?
Normally, an LLC is taxed as a disregarded entity. This means the income from the LLC passes through to the owners' individual tax returns where it is subject to self-employment taxes and income taxes.
Owners of an LLC electing S corp status are no longer taxed in this way. Instead, the owners are treated by the IRS as employees of the company. As employees, the owner(s) must receive a reasonable salary and pay only employment and income taxes on that salary. Distributions are subject to income taxes only.
S corp owner(s) can save about 17% in taxes if the following statements are true:
- The business can pay the owner(s) a "reasonable salary" every year.
- There are substantial distributions year over year (about $20,000 annually).
- There is a positive return on investment for payroll service and accounting costs associated with running an S corp.
- The business meets S corp requirements.
A reasonable salary is one that is typical for an S corp owner in the industry. Thus, what counts as “reasonable” will vary based on the type of business.
There are a few disadvantages of S corps. These include closer scrutiny from the IRS, which will look to see if the company is actually paying its owners reasonable salaries; greater complexity, which could lead to filing mistakes and bookkeeping, payroll, and accounting costs; and a limit of 100 shareholders and one class of stock.
S Corp Savings Calculator
Calculate how much you can save by choosing an S Corp tax classification
As a Sole Proprietorship or Single-Member LLC
Self Employment Tax:
Salary Employer Tax
(S Corp pays)
Savings on Self Employment Taxes
Against this savings, you have to balance the time and costs of running payroll and tax withholding. To learn more about what this will cost, get a free tax consultation.
How to Elect S Corp Status for an LLC
Before electing S corp status for your LLC, you first have to determine whether your company qualifies to do so according to the IRS. In addition, you have to decide whether it makes sense for your business to elect S corp status or remain an LLC. Below, we explain:
Qualifications for Electing S Corp Status
Not just any LLC can elect to be taxed as an S corp. Rather, the LLC must:
- Have no more than 100 shareholders.
- Issue only one class of stock.
- Be owned by individuals who are US citizens or permanent residents.
- Not be owned by business entities like LLCs, corporations, or trusts.
If your LLC meets these criteria, it may elect S corp status. However, read on to see when it makes sense to do so.
How to Elect S Corp for a New LLC
A new LLC can elect S corp status from the IRS during formation when it requests an employee identification number (EIN). There are six steps to forming an LLC and elect S corp status:
Step 1: Select a State
Step 2: Name Your LLC
Step 3: Choose a Registered Agent
Step 4: File the Articles of Organization
Step 5: Create an Operating Agreement
Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Use our state guide for instructions on how to form an LLC in your state.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
Every LLC needs a unique name that meets state naming regulations. Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.
A registered agent is a person or entity that you designate to receive court papers and other official documents on behalf of your company. The registered agent is listed in your Articles of Organization.
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Our operating agreement tool is a free resource for business owners.
An EIN is a number that the IRS uses to identify and tax businesses. It functions the same way a Social Security number does for an individual.
EINs are free when you apply directly with the IRS. When you apply for an EIN, the IRS will provide a link to Form 2553, which you use to elect S corp status.
For more information, see our LLC vs. S Corp guide.
Filing Form 2253
Form 2553 is the IRS Election by a Small Business Corporation form. An LLC or corporation uses Form 2553 to elect S corp tax status.
To file Form 2553, an LLC that is eligible for S corp status needs to:
- Check Form 2553 Due Dates
- Complete and File Form 2553
Check Form 2553 Due Dates
An LLC must file Form 2553:
- No more than two months and 15 days after the beginning of the tax year in which the LLC wants the S corp election to be effective
- Any time in the year before the tax year that the LLC would like the S corp election to be effective
An LLC can elect several different tax years and remain eligible for S corp election. For more information, see the "general" section of the IRS instructions to Form 2553.
Complete and File Form 2553
For instructions on completing and filing Form 2553, as well as where to send it, see our Form 2553 Instructions guide.
Recommended: Let Collective form your S corp or convert your existing business into one. If you're a solopreneur, the service will also handle your monthly accounting, identify your tax savings, and more.
S Corp Frequently Asked Questions
Do I need an attorney to form an S corporation?
While it is always good to seek professional legal advice, it is possible to form an S corp without an attorney if you have an LLC.
Where can I find S corp tax return forms?
Subchapter S Form 1120S is available on the IRS website.
Which is better for taxes LLC or S corp
The default LLC tax status is better for small businesses that reinvest profit to grow their business. An S corp is better for businesses that have profit left-over to pay owners a reasonable salary and at least $20,000 in distributions.