The Single Member LLC Taxed as an S Corporation

As a single member LLC your entity is considered a “disregarded entity” for federal tax purposes. That means that while you have the limited liability protection afforded an LLC, you are taxed the same as if you were a sole proprietor. All of the profits and losses flow down directly to you as an owner…. Read More

As a single member LLC your entity is considered a “disregarded entity” for federal tax purposes. That means that while you have the limited liability protection afforded an LLC, you are taxed the same as if you were a sole proprietor. All of the profits and losses flow down directly to you as an owner.

One potential downside to this structure is paying the self employment tax on the profits generated by the LLC. However, you have the option of making an S corporation tax election for your entity.

Like a single member or multi-member LLC, an S corporation is considered a pass-through taxation structure.

So why consider the S corporation tax election if they both are pass through entities?

One reason is that by making an S corporation tax election the owner can now make themselves an employee of the entity, pay themselves a reasonable salary (and take note that the IRS is serious that the salary must be reasonable), and take any other profits left over as a distribution. The distributions from an S corporation do not carry any employment related taxes. In comparison all profits in the standard single member LLC setup carry with them self-employment taxes.

While there can be tax advantages to electing to have your LLC taxed as an S corporation, there are limitations on who can be an owner of an S corporation. For example, corporations, partnerships, and nonresident aliens cannot be an owner of an S corporation. Instead, the owners of an S corporation must be U.S. citizens, residents or certain trusts, estates, and tax-exempt corporations (including 501(c)(3) corporations).

To elect S corporation tax status, you must file IRS form 2553. There are limitations for when the election can be made – it must be filed either within 75 days of forming the company or by March 15th to ensure it applies to the current year.

Aspects such as what you must set as a reasonable salary, when the S corporation election will apply, and the added administrative paperwork make filing the S corporation election a decision you should definitely run by your CPA or another tax expert. Simply making the election to avoid self-employment taxes can be an endeavor you’ll later regret as it does not make sense for all single member LLC owners.

If you have questions about forming a single member LLC, we recommend TRUiC’s guide HowToStartAnLLC.com or please don’t hesitate to contact us at info@bendlawoffice.com, or at (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Should Your California Professional Corporation Elect To Be Taxed As An S Corporation?

Should your company elect to be taxed as an S corporation? In California, certain professions that require a state license are prohibited from forming a limited liability company or a traditional corporation and instead must incorporate as a professional corporation. By default, California professional corporations are taxed as C corporations. As a C corporation, your… Read More

Should your company elect to be taxed as an S corporation? In California, certain professions that require a state license are prohibited from forming a limited liability company or a traditional corporation and instead must incorporate as a professional corporation. By default, California professional corporations are taxed as C corporations. As a C corporation, your professional corporation would pay federal taxes on its profits, and you would also pay individual taxes if you receive salary, bonuses, or dividends from the corporation.

  1.  Tax Advantages of the S Corporation

By electing to be taxed as an S corporation, your professional corporation would instead be a pass-through tax entity, like an LLC or a partnership.  Electing to be taxed as an S corporation may also allow you to pass losses from the business to your personal income tax return, where you can use the losses to offset income that you may have from other sources.

Finally, if the corporation pays you a “reasonable salary,” you may not be required to pay self-employment taxes on any shareholder dividends you receive in addition to your reasonable salary.

  1.  Disadvantages To Being Taxed as an S Corporation

A drawback of electing to have your professional corporation taxed as an S corporation rather than a C corporation is the cost of the premiums for shareholder benefits. In a C corporation, costs like insurance coverage are deductible as a business expense. Additionally, the shareholders may not be taxed on the value of the benefits.

Another drawback is the restrictions on who can be a shareholder of an S corporation. For example, S corporations may not have shareholders who are non-resident aliens.

Finally, S corporations may only issue one class of stock whereas C corporations can have different classes of stock that have different rights and liquidation priorities.

  1.  Conclusion

You should consult with your CPA or tax professional to make sure being taxed as an S corporation is the best fit for your professional corporation. However, for most California professional corporations, an S corporation election is likely to provide the most tax savings.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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