Can an LLC Be Taxed Like an S Corporation?

By Ari Mushell, J.D.

Can an LLC Be Taxed Like an S Corporation?

By Ari Mushell, J.D.

Now that you're ready to start your business and have compared the different types of business entities available, you've decided to form an LLC. You chose the LLC model primarily because of its ease of incorporation and because it shields your personal assets through its limited liability status. Another basic feature of an LLC is that it provides its owners, called members, with pass-through taxation.

Man sitting in office

However, when incorporating as an LLC, you have a choice of how to be taxed. While the default LLC tax scheme is attractive, it may not necessarily be the best choice for you and your business. Instead, it may be advantageous to choose C or S corporation tax treatment.

Pass-Through Taxation

LLCs, by default, are pass-through taxation vehicles, meaning that business income passes through to the members, who in turn pay tax on that income on their personal tax returns. Pass-through entities avoid the double-taxation corporate structure, where tax is assessed at both the corporate and individual levels.

This economic advantage is a significant incentive for people to choose the LLC model. Nonetheless, it may still be advantageous to choose C or S corporate tax treatment, which is done by filing the proper form with the Internal Revenue Service (IRS).

Choosing Corporate Tax Status

The structure of an LLC has both tax advantages and disadvantages. Depending on the circumstances, it may be more beneficial to file for C corporation tax treatment, done using Entity Classification Election (Form 8832), or S corporation tax treatment, done with Election by a Small Business Corporation (Form 2553).

Because the LLC default tax is pass-through taxation, the income to the member may push his personal tax rate into a higher bracket. For instance, if, due to pass-through taxation, the member earns more than $414,401—the threshold for the highest federal tax bracket as of 2018—the member is taxed at 39.6 percent.

On the other hand, an LLC that chooses C corporation tax status is taxed at 21 percent, per the Tax Cuts and Jobs Act of 2017. While the member is personally taxed on a distribution from the LLC, the member's effective tax rate may still be lower than the personal rate, despite double taxation.

Another option is to choose S corporation tax treatment. An S corporation, like an LLC, has pass-through taxation. An S corporation taxation plan also allows LLC members to receive compensation as employees. This means that instead of paying Medicare and Social Security taxes on all profits, these taxes come out of the salary portion only.

State Taxes and Fees

Note that even though an LLC can avoid double taxation at the federal level with the pass-through structure, it is still subject to local and state taxes. For instance, California assesses an $800 annual tax on LLCs, plus an additional fee of up to $6,000, depending on the LLC's revenue (as of 2018).

When starting an LLC, consider the tax options. While the default pass-through taxation option is attractive, it may not be the best option for your circumstances.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.