If you think you can benefit from the combined features of using an LLC to own and operate your small business and then having it be taxed like an S corporation, the possibility exists to establish your business as an LLC, but then make the election to have it treated as an S corporation by the IRS for tax purposes. You’ll have to make the special election with the IRS using Form 2553. Here are some things to remember:
- From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration—fewer formal meetings and record-keeping requirements. I can hear your sigh of relief!
- From a tax perspective, your enterprise will be treated as an S corporation. You’ll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.
- The business entity can pay wages and salaries to you or to other owners. This amount will be subject to FICA tax and other withholding requirements. But then, it can distribute the remaining net earnings to you and the other owners as passive dividend income, not subject to SECA tax.
- Being treated as an S corporation may provide opportunities for tax planning to minimize the overall tax liability for your business and you.
Obviously, you need to carefully consider the pros and cons of different forms of business organizations and the different ways these organizations can be taxed. Seeking professional advice from a CPA or tax attorney is always a wise practice when making choices like this that can affect your business for many years to come.
But setting up an LLC and then electing treatment as an S corporation may just give you the best of both worlds—the ease of administration of the LLC and the tax planning opportunities of the S corporation. Talk to your professional advisor today.