f you are wondering how to do an S-Corp election, this guide will show you how. You will first need to know what an S-Corp is.
It’s not a different entity than an LLC, but you can elect to have it taxed as one if you want to save money on taxes. Here are the steps involved. You must file Form 2553 and pay the necessary taxes.
If you’ve already formed a business and want to receive S-Corp tax treatment, you should file your election before you start conducting business. If you start a business prior to incorporating, you can conduct it as a sole practitioner, but it doesn’t have a legal corporate existence. Alternatively, you can file a proprietorship or partnership return and then elect S-Corp tax treatment when you’re ready.
Some Basics
Before you file your Form 2553, you need to determine whether your corporation is eligible for an S-Corp election. You need to consider several factors, including the anticipated profits, dividends to shareholders, and the employees of your business.
If your business will pay dividends to employees, you can elect to become an LLC or a partnership instead. However, you may have other options, such as a limited liability company.
You can also apply for retroactive approval of an S-Corp election. You can do this if the deadline has passed and you’ve failed to file Form 2553 on time. The IRS will then approve your request if you explain on your Form 2553 why you missed the deadline.
This could be due to a problem with the responsible party, an accountant, or a tax professional, or even the fact that your corporate leadership did not know the deadline for filing the Form.
What is an LLC
An LLC is an entity that offers the benefits of a corporation and pass-through taxation of a sole proprietorship. An LLC protects its owners’ personal assets in case of litigation and a lawsuit can be filed against it. In addition, the owners of an LLC pay taxes on their own return and have complete freedom to manage the business as they see fit.
To form an LLC, owners file Articles of Organization or Certificate of Formation with their state’s Secretary of State. LLCs need operating agreements to outline the contributions of members and their style of management.
The tax treatment and required forms depend on the type of business structure used. For small business owners, LLCs are a good choice because they are easier to operate than a corporation. An LLC is similar to a partnership, but offers members limited liability protections.
An LLC can have as many owners as it wants, so it’s convenient for entrepreneurs. An LLC is a hybrid entity, combining features of a corporation, partnership, and sole proprietorship.
Forming an LLC is ideal for real estate businesses because it protects the owners’ personal assets in the event of legal issues. When an LLC is involved in litigation, its owners can choose to pay the judgment out of personal assets, which protects them from individual liability.
Another advantage of an LLC is that it’s easy to file. A simple operating agreement can make the process of filing an LLC much simpler.
S-Corp Benefits
The tax benefits of an S-corporation are numerous, and there are a number of advantages to operating your business through this type of structure. The most significant difference between an S corporation and an LLC is the way profits are allocated to owners.
While LLCs can allocate profits however they wish, an S corporation is required to distribute profits based on the percentage of ownership and the number of shares. In the past, a founder could receive a disproportionate share of profits, but the new law limits that allocation to 50 percent.
Another significant difference between an S corporation and a traditional corporation is that shareholders are both the employee and the investor. This means that an investor cannot deduct expenses like cell phone bills or internet use.
As an S-corporation, you can use your SSN, but you cannot use it to deduct home office expenses, and you can’t deduct the cost of an employee’s cell phone. However, an S-corporation can freeze its net operating loss, and there are a few other benefits.
Another major difference between an S-corporation and a C-corporation is the way in which profits and losses are allocated. S-corporations can benefit individual shareholders by deferring the tax burden associated with paying taxes on the income they receive.
S-corporations can also benefit from the lower tax rates associated with C-corporation-owned businesses. However, these advantages must be weighed against the disadvantages of operating a C-corporation.