The LLC Taxed as S Corporation

The LLC taxed as S corporation – good idea or bad?

By default, a single-member LLC is a “disregarded” entity, that is, the entity is ignored by the IRS and the sole member is the taxpayer.  Thus, an individual as a sole member running a business would be taxed on his personal return as a schedule C, sole proprietor.  Many businesses run this way, which has no tax advantages and high risk of audit.

Most tax professionals would recommend running an operating business (especially with employees) as an S corporation.

But, what if you already formed an LLC?  No worry, you can convert the LLC for federal income tax purposes to an S corporation.  This involves several steps:

1. Get a federal tax ID# from the IRS.

2. File IRS form 8832 to choose an entity election as a corporation

3. File an S corporation election form (IRS form 2553)

4. Amend your operating agreement to allow for the new taxation rules (or, if you don’t have one at all, CREATE an operating agreement).

The LLC tax as S corporation may require the assistance of a tax advisor and/or attorney to complete, depending on how comfortable you are with the forms and documentation.

The next issue is whether the LLC taxed as S corporation must ACT like a corporation for tax purposes even though the state LLC laws may not require it? For example, do you need to issue stock certificates, have annual meetings and resolutions like a corporation?  While the state may say “no”, the IRS auditor may say YES!  So, even though you like the informality of an LLC, you still may need to issue certificates and keep annual minutes and document resolutions for all activity your LLC does that is out of the ordinary course of business (such as large purchases or leases, loans in and out, etc).

While still rather new, the LLC taxed as S corporation can be a feasible proposition for someone who formed a single member LLC and should have really created an S corporation.