Sunday, April 12, 2009 Treating your LLC like an S-CorpYou are probably wondering, why would I want my limited liability company to elect to be treated as an S-Corporation? Wouldn't I be better off forming an S-Corp right from the beginning? The answer is, it depends.
LLCs are more flexible in regards to structure, and do carry less formalities when it comes to corporate governance. You still have to be compliant, or California may come after you, but for the most part less corporate governance and compliance is required. So why would you make the election to treat your LLC as an S-Corp? If you find the flexibility and ease of corporate governance for LLCs attractive, yet find that the tax advantages of S-Corps applies to your company, you can go ahead and combine the two.
Of course, you will still have to satisfy the requirements of S-Corporation: Domestic corporation or eligible domestic entity (LLCs are) No more than 100 shareholders Shareholders must be individuals, estates, certain trusts and exempt organizations No non-resident alien shareholders Only one class of shares Cannot be: A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585, An insurance company subject to tax under subchapter L of the Code, A corporation that has elected to be treated as a possessions corporation under section 936, A domestic international sales corporation (DISC) or former DISC. Tax year ending 12/31, a natural business year, an ownership tax year, a tax year selected under section 444, 52-53 tax year based on any of the above, or any tax year for which the corporation establishes a business purpose Each shareholder consents in writing If you satisfy all these requirements, then you should look into possibly electing S Corporation treatment for your LLC, which is done by completing Form 2553 (Instructions) and possibly Form 8832. For California, you are no longer required to send in any forms to report, elect or terminate S corporation status. Federal S election and termination are binding for California. |