How can an LLC elect S Corp tax status? . -- Kiritsis Law Firm Group 212 922 0005

Apr 27, 2021

An LLC choosing S Corp election for tax purposes, can provide enormous employment tax savings, and reduce the risk of the business getting audited by the IRS.

Amending the operating agreement is practically a prerequisite.

Since, LLCs are designed to have flexible management with few corporate formalities, while S Corps impose strict ownership requirements, along with many formalities; a carefully drafted amendment of the LLC's operating agreement would need to be made, in order to bridge the gap, of these two regulatory frameworks.

A single member LLC can transition to S Corp tax election.

Single member LLCs are a disregarded entity, for federal tax purposes.  They are not considered partnerships, like multi member LLCs, in terms of federal taxation. This is important, because partnerships do NOT qualify for S Corp tax treatment. This mean single member LLCs can elect corporate tax treatment, and then make the leap to S Corp tax election.

Statutory conversion.

Depending on the jurisdiction, it may be possible for an LLC to convert into a Corporation.  Doing this conversion opens the possibility for milt member LLCs to seek S Corp tax election.

Statutory merger.

If a statutory merger is not available in your jurisdiction, or just too costly for state and local tax purposes, then there may be another alternative.  This involves creating a separate entity, a Corporation, and then has the LLC merge into the Corporation. Similar to a conversion, this may make multi member LLCs eligible for S Corp tax treatment. An additional option, which is too complex to discuss on this part, but is worth mentioning, is a no statutory conversion.

 

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