Question

Nicole who is a one-member LLC. It says she has the option to be treated for tax purposes as a C corporation and also make the election to become an S corporation.I understand there might a tax benefit or disadvantage by electing to be treated as a C corp but why would a one-member LLC want to be treated as a S corp when they are both pass-throw entities and would have the same tax effect?

Answer 1

If you think you can benefit from the combined features of using an LLC to own and operate your small business and then having it be taxed like an S corporation, the possibility exists to establish your business as an LLC, but then make the election to have it treated as an S corporation by the IRS for tax purposes.

If you decide to form an LLC to own and operate your small business, you have a couple of choices for how you want your LLC to be taxed. For federal income tax purposes, there is no such thing as being taxed as an LLC. Instead, an LLC can be taxed like a sole proprietorship, a partnership, a C corporation or—if it qualifies—an S corporation.

Sole proprietorships, partnerships and S corporations are all pass-through entities for tax purposes. But they are not taxed the same. A main difference is that Subchapter S of the Code imposes a number of restrictions on the entities that can select S corporation taxation. In general, the company must be formed in the United States, there cannot be more than 100 owners, only individual, US residents can own interests, and there can only be one class of owners—no preferred shareholders or members. Subchapter K, which governs entities taxed as partnerships, contains no such restrictions.

From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration—fewer formal meetings and record-keeping requirements. I can hear your sigh of relief! From a tax perspective, your enterprise will be treated as an S corporation. You'll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.

Being treated as an S corporation may provide opportunities for tax planning to minimize the overall tax liability for your business and you.