Discussion:Difference between LLC filing as S-corp and S-Corp
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| State law typically says that an LLC has to have "LLC" or "limited liability company" in its name, so that's what you have to do with an LLC.}} | State law typically says that an LLC has to have "LLC" or "limited liability company" in its name, so that's what you have to do with an LLC.}} | ||
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| + | {{ForumReplyPost|UserID=DianeOffutt|Date=18 January 2007|Text=Thank you for your quick response. | ||
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Revision as of 05:03, 18 January 2007
Discussion Forum Index --> Tax Questions --> Difference between LLC filing as S-corp and S-Corp
| 8 November 2006 | |
| I am not familar with S-Corp's. What is the advantage between forming an LLC electing to file as an S-corp. or just electing S-corp status without first forming an LLC. Can a single memeber LLC elect to file as an S-Corp. | |
| 8 November 2006 | |
| Yes, a SMLLC can elect S corp treatment. However, I think you need to find out tax advantages & disadvantages of each form before deciding whether or not to form an LLC.
Step one - figure out whether you want to be taxed like a sole proprietor or like an S corp. Step two - form the legal entity based on your decision in Step one. If you want to be a corp, set up a corp. If you want to be a sole proprietor with some legal protection, form an LLC. There are lots of threads here already discussing taxation of S corps. | |
| November 8, 2006 | |
| Agree with JD. The problem in the first choice is the lack of direction and certainty of many legal issues around the different form. Which controls? The LLC law or the Corp law? It isn't clear. I believe that if you want to be a corp, then incorporate. Then it is quite clear and easy to handle. | |
| 8 November 2006 | |
| Just to make it a little clearer. An LLC is simply electing to be taxed as an S Corp. Therefore state laws about LLCs will prevail. A corp will be subject to laws written about Corporations.
However legality and case history aside. The tax effect of both should be identical. One circumstance where they are not identical is state fees and taxes. LLC may be subject to certain taxes that are not the same as if corp. However I can onlythink of an example as a partnership vs. LLC right now. For partnership CA fees are different then llc being taxed as partnership. | |
| 8 November 2006 | |
| One more thing to be concerned with is if a SMLLC elects to be taxed as an S-Corp, they open themselves up to salaries. Form 1120-S instructions for items F and G say that an LLC that elects to treated as a corporation for federal income tax purposes is not eligible to be an S Corporation shareholder. Therefore for federal income tax purposes the individual is a S-Corp shareholder subject to employment tax rules. | |
| November 8, 2006 | |
| But Hadlin, taxes depend on the underlying legalities. We had a thread on the topic of how to handle rental issues between company and individual. And never could agree on how to handle it because the issues were contradictory...there are many others. | |
| 8 November 2006 | |
| One of the big attractions of LLCs is there's flexibility in allocating items of income, deductions, etc. So other than the self-employment tax issue, I don't get why a taxpayer would set up an LLC only be taxed under more rigid S-corp rules (unless there's some other non-tax benefits). Like some other folks noted, if you want to be taxed as an S-corp, you probably should form a corp. BTW, has anyone ever seen a situation where an LLC operating agreement potentially created two or more classes of stock where an S-election was made? | |
| November 8, 2006 | |
| Excellent point, Bengoshi! Wow...considering the affects of that! | |
| 9 November 2006 | |
| An LLC can be taxed as a partnership or as a C corp. The defualt is partnership taxation, so one must "check the box" to elect corporate (C corp) treatment. A single member LLC seeking pass-thru treatment should file a 1040 Sched C, not an 1120S.
I would advise against not forming an LLC or corporation and electing to be taxed as an association taxable as a corporation because you will not be afforded any liability protection under the law. | |
| 9 November 2006 | |
| Adding to my comment above . . .
A single member LLC can own stock in a corporation electing S status. See PLR 9745017. But now you're talking about forming an LLC and a corporation. | |
| 9 November 2006 | |
| Biolex I respectfully disagree with some of your post unless I am misunderstanding your post. An SMLLC defaults to sched c and Multimember LLC defaults to Partnership. These defaults can be changed by filing 2553 to elect sub s status where an 1120s must be filed. Each state can be different when it comes to the laws of being Incorporated vs LLC. A state may require minutes for an Inc but may not require minutes for an LLC. States have made LLC creation/continuance easier than a standard Inc and STILL have the liability protection. Of course this liability protection varies again by state, hence, the reasoning for LLCing in Nevada under certain circumstances. IRS states that they do not necessarily recognize an LLC so existing tax laws under partnership, C Corp, S Corp and Sole Prop apply to the LLC. BTW you can file a 2553 (Sub S Election) with out filing 8832. | |
| November 9, 2006 | |
| Yeah, I was torn between saying that or just letting the thread die. PDX is correct. | |
| 27 November 2006 | |
| Hi guys - I've spent numerous hours trying to understand this very issue but I am still lost. Our accountant and lawyer suggested forming an LLC electing S-Corp status. It is just two partners (a third is a non-US citizen and cannot own part of an S-Corp). My question is --- isn't an LLC already a pass-through to the owners? Why the "S-Copr election"? | |
| 27 November 2006 | |
| Multiple member LLC defaults to Partnership for tax purposes. Many difference between Partnership and S Corp. | |
| 27 November 2006 | |
| Here's the deal. Atty's like LLC's because (they say) you have less administrative stuff that can go wrong causing your LLC to be disregarded and voiding your liability protection. However, businesses have been incorporating for years. Yes, "piercing the vale" is of concern, but it does not happen very often. It is not difficult to maintain a corporation. Set up a separate checking account, keep separate books, file corporate tax returns, keep minutes.
But before setting up an LLC, look at the taxation of operating your business as an LLC versus a corporation. In your case, because one of the owners will be a non-US citizen, the option of forming an S corporation is not open to you, because non-US citizens are not valid shareholders of an S corp. So you have two choices before you: taxation as a partnership (for which an LLC is a better option than a plain old partnership) or a c corporation. Assuming you have discussed and understand the difference between partnership taxatation and C corp taxation, go with the recommendation of your attorney and CPA, set up an LLC and have it taxed like a partnership. For others reading this thread, however, the consensus of us frequent tax-almanacers is, if you want partnership taxation (or Schedule C taxation for a single-member LLC), set up an LLC, if you want corporate taxation, set up a corporation, not an LLC. The primary reason for having an LLC elect S corporation taxation is because the LLC was set up prior to thinking through how you really want the business to be taxed (or circumstances changed) and now, you already have the LLC set up, so an election can make it taxed like a corp. But it is not optimal, IMO. | |
DianeOffutt (talk|edits) said: | 18 January 2007 |
| I completely understand the tax consequences of LLC, versus C or S-Corp. My question is:
What is the legal name of a company you set up as an LLC, then elect S-Corp status....is it XYZ, LLC or XYZ, Corp? I have a new client that after much discussion of the pros and cons of taxation has decided on LLC, then S-CORP. Diane Offutt Woodstock, Georgia | |
| 18 January 2007 | |
| Names are a matter of state law. State law doesn't care how the IRS decides to treat you -- they're completely independent.
State law typically says that an LLC has to have "LLC" or "limited liability company" in its name, so that's what you have to do with an LLC. | |
DianeOffutt (talk|edits) said: | 18 January 2007 |
| Thank you for your quick response.
Diane Offutt | |
