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"LLC or S corp" sounds like a choice between two kinds of company. It is not. You form an LLC by filing with a state, such as Texas or Florida. S corporation status is something you ask the IRS for, by filing Form 2553, after the company exists. An LLC can do that, so the two can be the same business at the same time. This page explains how the election works and what it changes. It is general information, not tax advice.
What each one is
The LLC is a state creation. The IRS LLC page calls it "a business structure allowed by state statute." You file articles of organization, pay the state's fee and keep up its yearly report.
The S corporation is a tax label. The IRS S corporations page describes S corporations as "corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes." The form that makes the election is Form 2553. The About Form 2553 page says "A corporation or other entity eligible to be treated as a corporation files this form to make an election under section 1362(a) to be an S corporation."
That phrase "other entity eligible to be treated as a corporation" is what lets an LLC in.
How an LLC is taxed if it does nothing
Without any election, the IRS treats a one-member LLC as "an entity disregarded as separate from its owner" and an LLC with two or more members as a partnership. The owner of a one-member LLC that runs a business pays self-employment tax on its profit. The IRS single-member LLC page says the owner "is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship."
What changes after an S election
Income still passes through. The IRS says shareholders "report the flow-through of income and losses on their personal tax returns," which "allows S corporations to avoid double taxation on the corporate income." The company files its own return, Form 1120-S.
The big change is pay. An owner who works in the business becomes an employee for tax purposes. The IRS page on S corporation employees, shareholders and officers says that if the shareholder "received or had the right to receive cash or property, then the S corporation must determine and report an appropriate and reasonable salary for that shareholder." That salary runs through payroll, with withholding and employment tax returns. Profit above it is passed through to the owners.
This is why some owners elect and others do not. The election adds payroll and a separate return, and whether it saves tax depends on your numbers. An accountant can run them for you.
Who can elect
The IRS lists the tests. The company must:
- "Be a domestic corporation" (an electing LLC is treated as one)
- Have only allowable shareholders, who "May be individuals, certain trusts, and estates" and "May not be partnerships, corporations or non-resident alien shareholders"
- "Have no more than 100 shareholders"
- "Have only one class of stock"
- Not be an ineligible corporation, such as certain financial institutions and insurance companies
The rule on non-resident aliens matters for foreign owners. An LLC owned by someone who lives abroad and is not a US tax resident cannot be an S corporation. Our LLC for non-residents guide covers the filings that apply instead.
How an LLC elects
The Instructions for Form 2553 say an entity eligible to be treated as a corporation that meets the tests "will be treated as a corporation as of the effective date of the S corporation election and doesn’t need to file Form 8832." So one form does the job.
Timing is strict. File "No more than 2 months and 15 days after the beginning of the tax year the election is to take effect," or "At any time during the tax year preceding the tax year it is to take effect." The IRS form also needs every shareholder's consent: the S corporations page says Form 2553 must be "signed by all the shareholders." For an LLC, the instructions tell you to enter each member's "percentage of ownership" in place of a share count.
The LLC needs an EIN first. See EIN for an LLC.
What the state sees
Nothing changes on the state register. Your company is still an LLC, with the same name ending, the same registered agent and the same yearly report and fee. Check your state's dates in our annual report deadlines list. If you are still deciding between an LLC and a corporation as the legal form, read LLC vs corporation, and if you are a one-person business deciding whether to form at all, read LLC vs sole proprietorship.
The S corporation election is made on Form 2553. Our guide covers the deadline.