How to Form an LLC Taxed as an S Corporation

LLC Taxed as an S Corporation

Form an LLC taxed as an S corporation if you would like the flexibility associated with an LLC and the payroll tax savings associated with an S corporation.

November 23, 2021

The phrase “LLCs taxed as an S corporation” is a frequent source of confusion.

The reason is that LLCs (also known as Limited Liability Companies) are technically different entity types than corporations.

You conventionally form either an LLC or an S corporation. One or the other.

Nonetheless, you actually can create an LLC taxed as an S corporation, which is basically an LLC which opts to take advantage of the tax benefits of an S corporation by filing paperwork with the Internal Revenue Service (IRS).

Consult With an Experienced Business Attorney

Always consult with an experienced business formation before deciding to proceed with forming an entity.

Make sure doing so is the best course of action and weigh the pros of cons of forming a C corporation, S corporation, LLC taxed as a sole proprietorship (if your LLC has one owner), LLC taxed as a partnership (if your LLC has two or more owners), LLC taxed as a C corporation or LLC taxed as an S corporation.

Take liability protection and tax savings into consideration and make sure you make the right decision from day one.

If you would like to have your entity formed by a licensed attorney, simply call us at (800) 989-5294 or simply get the process started online.

LLC S Corporation

File Articles of Organization

The first step is to officially file Articles of Organization (sometimes alternatively referred to as a Certificate of Formation) with your respective Secretary of State.

Articles typically include the LLC name, business, agent of service of process and business type. Some states request more detailed information and some states (e.g., Delaware) request less.

Prepare an Operating Agreement Which Specifically Reflects an LLC Taxed as an S corporation

Operating agreements reflect, among other things, the LLC ownership and management.

Since entities taxed as S corporations are only permitted to have one class of stock (pursuant to IRS rules), an LLC taxed as an S corporation should be a member managed LLC.

Make sure the operating agreement has specific language delineating that the LLC will be taxed as an S corporation.

Failure to do so could result in loss of your S corporation tax status in case of an audit.

Operating agreements, for LLC with more than one owner, also cover what happens in situations like divorce, incapacity, death and member disputes.

In community property states (e.g., California) the operating agreement should be consented to by each spouse of each member.

The primary purpose of an operating agreement is to identify each owner (member), their ownership percentage and capital contributions (money exchanged for ownership interests).

Prepare Organizational Minutes (Optional)

Minutes are not required for LLCs but they should be prepared for LLCs taxed as S corporations.

The minutes should confirm the S corporation tax status and confirm the officers of the LLC (if any).

Obtain an EIN

An EIN (Employer Identification Number) also known as a TIN (Taxpayer Identification number) is needed to open the LLC bank account and pay taxes.

The EIN is also needed to file the LLC’s S corporation election with the IRS.

File an S Corporation Election for the LLC

File IRS Form 2553 (S corporation election) to have your LLC taxed as an S corporation.

This IRS form requires information like the LLC name, date of formation, EIN and name of owners (and any spouses in a community property state).

File Your Initial Report

Some states require that an initial report be filed after LLC formation.

Information collected includes the business address and information about each LLC member.

Open an LLC Bank Account

When forming an LLC taxed as an S corporation, each member should make their respective capital contributions into the LLC bank account. This is an essential part of LLC formation. Without doing so, it may be difficult to prove ownership in the future.

Only use the LLC bank account for LLC finances.

Commingling LLC and personal funds can be grounds for invalidation of the LLC.

Securities Filings

Most LLCs are exempt from securities laws filings but some states require that an exemption be filed. Check with your state to ensure you are complying with applicable securities laws.

Local Business License

Find out whether the city your entity is based out of requires a local business license.

Local business licenses are typically issued for the purpose of paying local city taxes.

Corporate Transparency Act

In 2022, a new law called the Corporate Transparency Act, is going into effect. The purpose of this new federal law is to basically deter money laundering, tax evasion, cyber crime, terrorism and other criminal acts.

A willful failure to comply can result in stiff penalties and even prison time.

Accordingly, be sure to consult with your attorney about this important new law.

Maintain Your LLC Taxed as an S corporation

The process is not done after the LLC formation is complete.

Be sure to properly maintain your LLC for the life of its existence.

This means stay on top of all tax and annual report requirements.

If you would like us to properly handle the formation of your LLC, call us at (800) 989-5294 or simply securely order online now to get the process started:

LLC or S Corporation