When it comes to the taxation of an LLC, the most common way to go is to elect S-Corp status. This means filing Form 2553 with the IRS in addition to your state paperwork. If your LLC meets the requirements, the IRS will tax it as an S-Corp.
The rules for taxation are different from that of a traditional corporation. S Corps are pass-through entities, meaning that all profits are passed through to the owners’ personal tax returns.
S-Corp status gives the members of the LLC more tax benefits. This is particularly true if the business generates enough income to compensate the owners. As long as the business pays its owners, it may qualify for the S-Corp treatment.
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However, many businesses do not earn enough money to qualify. Even if you don’t make a ton of money, it will still save you money. You can also elect to tax your business as a C-Corp instead of an S-Corp.
What is an LLC?
One of the first things you should know about an LLC is that it protects you personally from any legal liabilities. Unlike a C corporation, you cannot be sued personally for debts you incur while running your business.
In addition, an LLC is a pass-through entity, meaning you will pay personal income tax on your profits, not that of the business. This means you’ll be less likely to face legal issues if your business is insolvent, and it can build credibility over time.
The structure of an LLC is similar to that of a corporation, with members electing a management group to oversee the business. Like a corporation, an LLC has a board of directors. In addition, it will have shareholders and directors who are responsible for the management of the business.
Members have direct influence over the decisions made by the company and their shares are represented by the membership interest. This structure is similar to that of a partnership or corporation.
An LLC is an excellent choice for a small business. The business structure is flexible and simple, and it can be owned by multiple owners. These owners are called members. By owning an LLC, you are protected from being personally liable for any debts or losses of the business.
What’s more, an LLC protects your personal assets if your business fails. The LLC structure is an ideal choice for many small businesses, and is an excellent choice for small business owners.
S-Corp Election for LLC
When it comes to the timing of the S-Corp election, there are several important deadlines to keep in mind. If you are forming a new LLC, you should make the election within 75 days after it is created.
However, if you are filing it late, you can still benefit from the tax advantages of an S-Corp election. You can elect either calendar tax year or alternate fiscal year and choose from two options for filing taxes. You will also need the consent of all of the members of the LLC.
As you can see, the S-Corp election is becoming more popular with small business owners. It offers benefits like 20% pass-through deduction and the QBI deduction. But it is important to note that it requires a lot of paperwork and isn’t automatic.
For instance, your S-Corp should have no more than 100 shareholders, and they must be individuals and not businesses. If you want to be able to take advantage of the tax advantages of an S-Corp election, you should set up your LLC as a C-Corp.
Form 2553 Filing Issues
Generally, you can’t file Form 2553 electronically. You can mail it or fax it if you have the proper address and mailing address. The IRS provides a breakdown of mailing addresses and fax numbers by state.
Make sure to write down your address on the form so that you can mail it in the appropriate way. If you’re not sure where to find these addresses, consult their directory. There are also a variety of other options for filing your form.
Generally, Form 2553 contains four parts. The first part is a relatively simple one, and can be completed online and printed out. It asks for information about the business, including basic information and an Employer Identification Number (EIN).
The EIN acts as the company’s “social security number” for tax purposes. You’ll also need the names of any owners or shareholders. If the business is not a corporation, it can still elect to be treated as a partnership or S corporation.
S-Election Period
The S election period starts when the corporation has shareholders, begins conducting business, or acquires assets. The earliest of these three events will be listed on the form. The shareholder’s consent must be provided before the corporation can file Form 2553.
Once you’ve signed the form, the shareholders can sign and date the form. Remember, you have until January 15 to file your form. After that, you’ll need to include any additional rows for your business.
If your business has multiple owners, you’ll have to enter each shareholder’s name, address, and Social Security Number. Be sure to include the EIN for each shareholder, as well as their percentage ownership.
If the shareholders are married, you’ll need to enter their Social Security number and trust’s EIN. You’ll also have to give the business’s legal representative your Social Security number and title.
How to make the election?
In order to qualify for S-Corp status, your LLC must have a state charter and file a valid S-Corp election. Additionally, your S-Corp will be exempt from the self-employment tax and payroll taxes for any profits you make.
By separating your personal finances from your company’s, you can avoid double taxation and keep your business separate from your personal life. So, you can avoid double taxation by filing your LLC as an S-Corp.
An S-Corp is an option for owners who make over $75,000 a year. As a result, an S-Corp will allow the owner-employee to split profits into two categories: profits and distributions.
The profits earned by an S-Corp are subject to 15.3% Social Security, Medicare, and self-employment taxes, while profits from a pass-through LLC will be subject to 15.3% tax.
| S-Corp Pros | S-Corp Cons |
|---|---|
| Reduced Audit Risk | Owner W2 Required |
| Clean Accounting for Separate Return | Increased CPA Fees |
| No Self-Employment Tax on Profits | Complex Filing Requirements |
Final Thoughts
If you have a successful and growing business it might make a lot of sense to convert it to an S-Corp. Hopefully, this post has given you come good information on how to file form 2553.
Make sure you review your situation with your CPA and/or financial advisor to determine the best option for you. You might find that an S-Corp is the best option for you!