Changing Your LLC Tax Status to a Corporation or S Corp
Using Form 8832 for Corporate Tax Status or Form 2553 for S Corp Tax Status
Your financial advisor may have told you there are benefits to having your LLC file an election to be taxed as either a corporation or an S corporation. This article discusses the benefits and process of filing such an election, and how to use Form 8832 for this filing.
If you change the LLC's tax status to a corporation or S corporation, the legal status of the LLC remains the same. In other words, you still function as an LLC in every way except taxes.
Changing the tax status of a business is a complex issue and it has potential tax and other effects you should be aware of. This article includes a general information about this subject. Before you make any changes to the status of your LLC, discuss the benefits and drawbacks with your tax professional and tax attorney.
Default Taxation for an LLC
- A single-member LLC is considered a disregarded entity, and pays income tax as a sole proprietorship, through the member's personal tax return.
- A multiple-member LLC pays income taxes as a partnership.
Use Form 8832 for Corporation Tax Status
If you want your LLC to be taxed as a corporation, you must file IRS Form 8832 - Entity Classification Election. You can use this form to be taxed as a corporation, a partnership, or an entity disregarded as separate from its owner.
Here are some things you need to know about this election:
- The form allows "eligible entities" to file this election. LLCs are specifically stated to be eligible entities.
- The IRS uses the term "association" to mean "an eligible entity taxable as a corporation by election...."
- The form includes a consent statement which may be signed by all members, or by one member on behalf of all members. If one member signs, there should be some record in company membership meetings that all members approved this election.
- You must provide the name(s) and identifying number(s) of owners (Social Security Number for a single-member LLC, and Employer ID for multiple member LLC).
Why Elect S Corporation Status
The other tax option for your LLC is to elect to be taxed as an S corporation. Your LLC will need to meet the eligibility requirements of S corporation status.
Both the LLC and S corporation are pass-through entities, meaning that the income of the business passes through to the owners.
S corporation status has two benefits:
1. It allows the business to avoid the double taxation issue of corporations.
2. It separates the owners from the business, allowing the owners to be employees, and having payroll taxes withheld from their income. This is a benefit to the owners if the LLC is profitable and the owners have high self-employment taxes (Social Security and Medicare taxes) on their income.
How to Elect S Corporation Tax Status
In the same way as a corporation elects S corporation status, an LLC elects S corporation status by filing IRS Form 2553 with the IRS. The election must be made no more than two months and 15 days after the beginning of the tax year when the election is to go into effect. This article on how a corporation elects S corporation status will give you more details.
If you want your LLC to be taxed as an S corporation, you don't need to file Form 8832 to elect to be taxed as a corporation.
What's Included in Form 8832
The form directs you through a series of decisions and questions to filing.
- The first section helps you to determine the eligibility of your business to apply for this change.
- The second section asks you to select your current entity type and the type you are selecting. (The terms "domestic" and "foreign" in this section have to do with the state where the business is)
- The last section includes a consent statement and requires signatures.
This is a complicated form, and it's best done with the help of an attorney.
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