The Takeaway for LLC Owners
LLCs that meet all of the requirements can elect to be treated as S Corps, which is a tax treatment. While LLCs already have passthrough taxation, which is one of the biggest benefits of S Corp elections for corporations, the owners of LLCs can sometimes use an S Corp election to reduce their taxes. S Corp elections allow owners to pay themselves a “reasonable” salary, subject to self-employment taxes, and avoiding self-employment taxes on any amount above that reasonable salary. That could mean big tax savings for the LLC’s members, but of course you should talk to your accountant first to see if it makes sense.
Qualifying as an S Corp
There are a few requirements to qualify as an S Corp (formerly known as a “Small Business Corporation”). While there is some nuance to the requirements, the basics are that:
1. The business cannot have more than 100 owners
2. Have owners that are businesses (e.g., a corporation cannot own part of an S Corp)
3. The business cannot have a nonresident alien as a shareholder
4. It cannot have more than one class of stock, with certain exceptions
5. The business can’t be one of a few types of ineligible businesses, like an insurance company
Typically your accountant can tell you whether it will make financial sense to make an S Corp election, but you should have your lawyer look things over as well to make sure the other requirements above are met.
If you meet the requirements and decide an S Corp election is right for your business, you can accomplish that by filing Form 2553 with the IRS.