Determining how your business is taxed after initial setup can result in tax savings when you choose the correct structure and form of taxation.
The big picture:
The IRS provides two major tax structures to businesses: Corporations, and Disregarded Entities.
- The “Corporation” designation recognizes the corporation as its own entity, taxing it separately from the individuals who own and run the corporation.
- The “Disregarded” designation applies to all other business entity structures, including partnerships and LLCs.
- LLCs can be taxed under either structure.
Why it matters:
If you operate an LLC and meet certain criteria, you can choose to be taxed as an “S-Corp,” removing a layer of taxation from your LLC while still operating under the “Corporation” tax structure.
- S-Corp status comes with pre-requisites in order for a business to qualify, including, among others, a requirement that fewer than 100 stakeholders own the LLC, and having just one class of stock.
- This choice should be made immediately after setting up your business, as the process of changing your tax structure after your business has been established for a period of time is expensive and complex.
KEEP IN MIND:
S-Corp election is not suitable for every LLC, and you should have legal counsel review your corporate structure to determine if it is ideal, or if you are even eligible.
- LLCs that do not conduct active business and exist simply as holding companies for real estate or other entities would not benefit from S-Corp election.
- S-Corp status can be revoked if your LLC does not follow the IRS’s rules for eligibility, resulting in your LLC reverting to the standard “Corporation” tax structure.
