Q: Why would I want my LLC taxed as an S corporation?

-Tax Saver

A: Dear Saver:

Outside of personal liability protection, one of the biggest benefits of an LLC is the flexibility the entity offers for taxation.

LLC owners, or members, get to choose how they want to be taxed: as a sole proprietorship, partnership, or as a corporation (either a C  or S corporation). Sole proprietorships, partnerships, and S corps are considered “pass-through” entities, meaning the business profit passes through the company to the owners and is taxed at their personal rates, rather than the corporate rate.

In such cases, your company doesn’t pay taxes at all. Instead, your share of the net business income is taxed on your personal tax return, along with the rest of your income.

If you elect for your LLC to be taxed as an S corp, you can qualify for additional tax advantages. As an S corp, you’ll have to pay payroll, plus payroll taxes, and file a tax return on behalf of the corporation (1120S). But as long as you pay yourself a reasonable salary, you only pay payroll tax on the amount of your payroll, not on any profit distributions from the company. In contrast, when LLCs are taxed as a partnership or sole proprietorship, you pay payroll taxes on all distributions. 

Once you are earning at least $75,000 of net income per year, the S corp election makes a lot of sense.

A Family Business Lawyer® can help you determine which entity tax status is best for your LLC and make sure you qualify for every tax break possible.