LLCs Vs. S Corporations in Mississippi

By Jeff Franco J.D./M.A./M.B.A.

If you are deciding whether to establish an LLC or an S corporation in Mississippi, you might not realize that you can actually have both. While there are certainly advantages to operating as an S corporation, it isn’t a business entity that you can create in Mississippi or any other state – an S corporation is merely an IRS tax election you can make for the LLC.

If you are deciding whether to establish an LLC or an S corporation in Mississippi, you might not realize that you can actually have both. While there are certainly advantages to operating as an S corporation, it isn’t a business entity that you can create in Mississippi or any other state – an S corporation is merely an IRS tax election you can make for the LLC.

Mississippi LLC Overview

Creating an LLC for your business requires filing a certificate of formation with the Mississippi Secretary of State’s office. Your certificate only needs to include a few items of information, such as the legal name of the LLC and the name and address of your registered agent. An LLC offers great flexibility, including the ability for you to function as its sole member or just one of many. Members may choose to draft an operating agreement that governs every aspect of the business rather than leaving the details to the general provisions of Mississippi law. In a nutshell, LLC members can run their business with little or no interference from state government.

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LLC Tax Rules

The LLC is a relatively new business entity, so there are few entity-specific tax rules that apply, unlike partnerships and corporations, which are governed by well-defined tax laws. For this reason, the Internal Revenue Service and the Mississippi Department of Revenue allow LLC members more flexibility to choose how they want business earnings to be taxed. Single-member LLCs are classified as sole proprietorships for federal and state tax purposes, while multi-member LLCs are designated as partnerships. However, the IRS allows LLC members to elect either C corporation or S corporation tax treatment instead.

S Corp Tax Rules

S corporation taxation uses tax concepts similar to partnership rules in that all business income and losses pass through to the members and are reported on their individual tax returns. Whether you are treated as a sole proprietor, partner or S corporation shareholder, the income taxes work out to be the same. The real benefit of an S corporation, however, is in the self-employment tax you can save. When reporting earnings as a sole proprietor or partner, most, if not all, of your company's earnings are subject to self-employment tax because the IRS and Mississippi consider you to be self-employed. With an S corporation election, only the reasonable salaries that members are paid for providing services to the LLC are subject to self-employment tax.

Making the Election

If you decide that an S corporation election would be advantageous for your Mississippi LLC, you and other members must agree to make the election and file Form 2553 with the IRS. To make the election, which is binding on the LLC for a minimum of five years, a number of tests must be satisfied. For example, the LLC cannot have more than 100 members, and none may be nonresident aliens. Further, only individuals, estates, certain trusts and exempt organizations can be members of the LLC to be eligible for the election.

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Tax Planning for an S Corporation

References

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The Pros & Cons of an LLC Vs. an S Corp in Virginia

Starting your own business requires making a number of important decisions, one of which is deciding what type of legal structure you want to form. Many business owners typically choose between a limited liability company and S corporation, both of which protect your personal assets from your business debts. Virginia law governs the formation of both of these legal structures.

What Tax Forms Are Needed for an LLC?

Federal tax law does not provide specific rules that govern every limited liability company. Instead, the Internal Revenue Service allows members of a LLC to choose between corporate, partnership and individual taxation. The type of tax return in which you report the LLC’s income and expenses depends on the tax structure you choose to apply.

How to Report Income as an LLC Member

Unless the members of an LLC elect otherwise, the IRS treats an LLC as a pass-through entity for tax purposes. This means that income for LLCs is reported on the personal tax return of the owner or owners, called members. Multiple member LLCs are taxed as partnerships, with each member's individual tax returns reflecting a share of gains or losses of the partnership. An LLC, however, can also elect to be taxed as a corporation.

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