What reason would a new entity have to be an LLC and then elect S Corporation status? If you wanted the liability protection, why wouldn't you just be an S Corporation from the inception date? I can understand that if you are already an LLC and the income gets too high, you could save Medicare tax by electing S Corporation and paying a salary of a portion of the net income and allowing the remainder to flow as an S Corp dividend with no Medicare tax, but I am unaware of any other reason.

asked 12 Nov '09, 22:01

David%20Himes's gravatar image

David Himes
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edited 27 Jun '10, 00:21

stephenweinstein's gravatar image

stephenweins...
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LLc's are easily formed on the internet, so quite a few of my clients have formed them from a template and then...holy sh** they are now not sure how they are taxed. My S-corp only clients if they have minutes, etc are rare indeed

(13 Nov '09, 18:08) SandySea

An LLC doesn't have to follow the same "corporate formalities" that an S corporation would have to follow. No requirement for an annual meeting or corporate minutes, for example.

On the tax side, choosing S corporation treatment would allow the business owners to receive salary and manage their social security tax burden more effectively than they otherwise might by being subject to SE tax on all their LLC earnings.

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answered 13 Nov '09, 17:32

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Howard Kass
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My only reason was as an LLC S-corp, the requirement for minutes is not there. I don't want to have to record it when I talk to myself.

Helen, EA in PA

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answered 12 Nov '09, 23:02

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Helen EA in PA
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Okay, but why did you elect S Corp status over partnership or sole proprietor (whichever applies)?

(06 Jun '10, 02:10) Tom

This is more of a legal question requiring consultation with an attorney. The only other "reason" that comes to mind is that it may be more efficient and cost effective to set-up an LLC first, especially a single-member LLC, and become an S-corp later, rather than incorporating and electing S status.

As an SMLLC is disregarded for federal tax purposes, it files as a division of its owner, which if an individual would be Form 1040, Schedule C, or Schedule E, if rental real estate.

A MMLLC does not have to file a partnership return if it only has "balance sheet" activity and no income, gain, deductions, or loss (Schedule K attributes), while a corporation once incorporated has a tax filing responsibility even if "dormant".

BTW, I also added a tag that this belongs on Lawqueries.com.

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answered 13 Nov '09, 01:39

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Brent Berkman
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An LLC will give you the liability protection, provided you operate it in a business manner, regardless of whether you elect to be taxed as an S Corp or not.

I think that, if you really want an S Corp, an LLC electing to be taxed as an S Corp is often a better choice. But if you're forming an LLC for liability protection, why not just be taxed as a partnership (or Sch C for a SMLLC) and dispense with minutes and payroll?

I can only think of a couple possible reasons, which I don't find very compelling: - State fees for LLCs vs S Corps might not be equitable in some states. - Depending on how what is being contributed to the entity, differences in partner/shareholder basis valuations might cause you to lean one way or the other. - Other state tax issues (such as NY's MTA tax) which might not be equal.

And since the loophole allowing S Corps to escape FICA on non-wages is likely to be closed soon, I see even less reason to elect S Corp taxation.

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answered 06 Jun '10, 02:09

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Tom
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Asked: 12 Nov '09, 22:01

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Last updated: 27 Jun '10, 00:21