LLCs Electing S-Corp Tax Status

When forming a new entity, business owners are often keen on the idea of forming a Limited Liability Company (“LLC”). With its limited liability for owners, pass-through of income and flexibility to choose method of taxation – it’s the most ideal choice for new business owners.

Benefits to LLCs electing S-Corp tax status

Most specifically regarding taxation, many LLC owners are opting to elect S-Corp tax status for a variety of benefits. For example, while retaining LLC structural advantages, owners can receive other net earnings in addition to wages. Only wages paid to owners are “earned income” subject to FICA Tax. Other net earnings that pass through to the owners are considered “dividends”, which aren’t subject to SECA Tax. Another possible advantage comes from the Tax Cuts and Jobs Act, which gives pass-through entities like S-Corps a twenty percent (20%) “qualified business income” deduction, if eligible.

Know the requirements and avoid boiler plate forms

While the benefits are plentiful, many business owners overlook the requirements to maintain S-Corp status, which can lead to termination of its election. Most often, this occurs through failure to update the business’s corporate books.

IRS Code § 1361 defines an S corporation as an eligible domestic corporation which does not have: a) more than 100 shareholders; b) a shareholder who is not an individual; c) a non-resident alien as a shareholder; and d) more than 1 class of stock.

By default, most standard LLC Company Agreements are not compliant with these requirements, specifically those found or prepared online. In addition to failing to meet these requirements, these documents typically include boiler plate language in its tax section, electing partnership status under federal tax law.

Beware the consequences for non-compliance

It is imperative that LLC owners electing S-Corp status, review and update their entity documents, specifically the Company Agreement and any amendments. Failure to comply with the IRS requirements not only leads to termination of S-Corp status, but automatic election of C-Corp status. Further, S-Corp status cannot be re-elected until after the fifth (5th) year in which termination or revocation became effective.

Let us help you enjoy the benefits and avoid the pitfalls

Holmes Firm PC has the experience in reviewing and preparing these documents to ensure IRS compliance. Let us help you continue to enjoy the benefits afforded to LLCs electing S-Corp tax status. Call us at (469) 916-7700 or send us an email via our contact page.