Changing Your LLC Tax Status to a Corporation or S Corp

There are benefits while your LLC file an election to be taxed as either an S corporation or a corporation. In this article you will find the benefits and process to file an election; and how to use the IRS 8832 Form to file for this election.
When you alter the tax status of the LLC to an S corporation or a corporation, but the legal status of the LLC remains unchanged. You will still function as an LLC in all the ways except the taxes part.

LLC Default Taxation

LLC (Limited Liability Company) is not considered as a taxing entity by the IRS. Hence an LLC pay the income taxes depending upon the membership structure of the company.

  • A single member LLC is a disregarded entity but pays the tax as a sole proprietorship via the member’s personal tax return.
  • A multiple member LLC pays the taxes as a partnership.

Corporation Tax Status Use Form 8832

When you want the LLC to be taxed as a corporation, then you should file the IRS 8832 Form, Entity Classification Election. Use the Form 8832 to be taxed as a partnership, corporation or a disregarded entity as separate from its owner.
Few things that are to be considered about the election:

  • “Eligible entities” for filing this election is allowed by the form. LLCs are specified as eligible entities.
  • The Internal Revenue Service uses the term “association” to specify “an eligible entity taxable ad corporation by the election.”
  • The form contains a consent statement that can be signed by all the members or by a single member on behalf of all the members. When a member signs, record related to that must be maintained by the company membership meetings, in which all the members approved the election.
  • You should give the name and identifying numbers of the owners (SSN) for a single member LLC, and Employer ID for multiple member LLC.

Why to Select S Corporation Status

LLC’s other tax option is to elect as an S corporation to be taxed. Your LLC must meet the eligibility requirements of the S corporation status.
Both the S corporation and LLC are the pass-through entities, which refers that the income of the business will pass through the owners.

Benefits of S corporation status

  1. This permits the business to prevent the double taxation issue of corporations.
  2. This parts the owners from the business, permitting the owners to act as employees, and having payroll taxes withheld from the income. This will benefit the owners if the LLC is profitable and the owners have high self-employment taxes ( Medicate taxes and Social Security) on their income.

How to Elect TaxStatus of S Corporation

Similar way as the corporation elects S corporation status, an LLC can elect S corporation status by filing the Form 2553 with the IRS. The election should be made not more than 2 months and 15 days after the starting of the tax year while the election is to go into effect.
When you want the LLC to be taxed as an S corporation, you do not need to file the Form 8832 to elect to be taxed as a corporation.

What is contained in Form 8832?

This form IRS 8832 guides you through the series of decisions and queries to file.

  • The 1st section assists you to define the eligibility of the business to apply for the change.
  • The 2nd section asks to select the current entity type and the selecting type.
  • The 3rd and the last section consists of a consent statement and requires signatures.

This form 8832 is one of the complicated forms and it is best done with the assistance of an attorney.
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