Info about the Limited Liability Company & Corporation

Can an LLC be an S Corporation?

Upon first glance, this question may sound strange to most people. How can a limited liability company entity also be a corporation?

But the answer to this is actually YES. You see, an “S corporation” designation is not a legal entity choice. Rather, it is a tax designation under the Internal Revenue Code. Before the existence of the LLC entity, the IRS created the S corporation as a way for a corporation that is a small business to avoid the double taxation of the corporate tax structure.

The S corporation rules require that the legal entity meet a laundry list of requirements that are designed to ensure that it truly is a small business as defined by the tax laws. These restrictions related to the number of owners, the type of owners, and a required simplicity of capital structure.

They named it the S corporation election because at the time, only the corporate legal entity qualified to elect S corporation status. However, in 1997, there were regulations passes that enabled the LLC (limited liability company) to also elect S corporation tax status if the LLC also met the laundry list of small business IRS requirements.

So, an LLC can be formed as a limited liability company under state law and gain all the state law benefits but also qualify to be taxed as an S corporation under federal tax laws. This is just one of the many advantages the LLC has over other entities. It offers the most tax choices.

Now, the LLC by default already qualifies for a single layer of taxation and there are no requirements to qualify for this. Accordingly, it does not have the same concern of double taxation as the corporation. Both the LLC default tax structure and the S corporation tax structure offer the same pass through taxation (single level) benefits.

However, there are some differences between the two tax structures that may or may not benefit your particular business. If this is an issue you want to explore, you should seek the advice of a tax attorney or a tax accountant who has ample experience in the differing tax structures.

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