How to Change 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 of the potential benefits if you decide to have 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 has potential tax and other effects you should be aware of. This article includes general information about the subject, but before you make any changes to the status of your LLC, discuss the benefits and drawbacks with your tax professional and tax attorney.
How an LLC Is Usually Taxed
Both single-member and multiple-member LLCs may elect to be treated as a corporation or S corporation for income tax purposes.
Electing Corporation vs. S Corporation Status
The process of changing the tax status of an LLC to a corporation or S corporation is called an election. The two processes are different:
- To elect Corporation status, the LLC must file IRS Form 8832 - Entity Classification Election.
- To elect S Corporation status, the LLC must file IRS Form 2553 - Election by a Small Business Corporation
An S corporation is not a separate business type for tax purposes. It is a type of corporation. A business that is already a corporation files Form 2553 to elect to be an S corporation.
What's Included in Form 8832
The form directs you through a series of decisions and questions to a 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.
More About Form 8832
If you want your LLC to be taxed as a corporation, you must file Form 8832. 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 form includes a consent statement which may be signed by all of the LLC members, or by one member on behalf of all members. If one member signs, there must 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).
Single-Owner LLC's and Form 8832
If your LLC has only one member (a single-member LLC), the options noted on the form are to be classified as an association or be disregarded as a separate entity. An LLC with only one owner can be classified as a disregarded entity. This designation means the LLC is not separate from the owner for income tax purposes (filing business income taxes on Schedule C as part of the owner's personal tax return). There is nothing you need to do to have this classification.
If you check "No" in Box 3 because you don't have more than one owner, you will need to give the owner's name and identifying number "(taxpayer ID number). Then in Part I, Box 6, you would check Box C "A domestic eligible entity with a single owner electing to be disregarded as a separate entity" or Box F "A foreign eligible entity...." (The terms "foreign" and "domestic" relate to whether the LLC is registered in more than one state. The first state is "domestic" and the rest are "foreign."
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:
- It allows the business to avoid the double taxation issue of corporations.
- 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.
Before you decide to have your LLC elect S corporation status, read the Instructions for Form 2553 to make sure you are eligible to make this election.The S corporation election must also be made at a specific time, relating to the tax year it will become effective. These details are also included in the Instructions.
More About Form 2553
- The election begins on a specific tax year and the type of tax year, including fiscal year (financial year).
- Your LLC probably doesn't have shareholders. In this case, the IRS says you should enter the percentage of ownership and dat(s) acquired. A single-owner LLC would have 100% of the ownership.
- As with Form 8832, all shareholders/owners must consent to the election.
These forms are complex! This article is not intended to be tax or legal advice or to give you complete information about filling out the election forms. Get help from your tax professional or attorney to complete the forms.