Picking your business’ tax election

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.
Michael Faehner

Michael J. Faehner

Michael J. Faehner is the founder of Faehner PLLC in Oldsmar, Florida. Michael focuses his practice on estate planning, corporate,…

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