When an LLC elects to be taxed as a corporation (whether as a C corp or an S corp) which recordation rules are they subject to. Specifically:

  • LLCs usually are not required to hold an annual meeting and keep minutes (though its a good idea) but corporations are. So for an LLC that has elected to be taxed as a corporation, is an annual meeting now required?

  • LLCs don't have stockholders, so technically there is no common stock, no additional paid in capital, no retained earnings. So how do you record and report on the 1120 (or 1120S) the capital accounts (or do you)?

  • Has an LLC that elected corporate tax treatment created a situation where additional recordkeeeping is now required? For example, must they NOW keep records as BOTH an LLC and a corporation? Must they keep a reconciliation worksheet to detail the items disclosed on the corporate return that are technically different from how an LLC normally records such things?

  • Does an LLC that elected corporate tax treatment now disregard all the normal LLC rules and keep all its records as though it were a corporation?

asked 18 Nov '09, 16:21

EAgent's gravatar image

EAgent
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Electing to be taxed as an S-Corp does not change the fact that it is an LLC. The more stringent record keeping requirements for an S-Corp would not apply.

Not strictly related to your question, but I some related points I think are interesting:

There may be state tax considerations. In New York, the annual filing fee for an LLC is less than for an S-Corp.

There are differences related to personal liability. Most articles focus on the liability protection an S-Corp or LLC affords its owner. A colleague shared an article with me, which unfortunately I can not find at the moment, of a case where an individual was sued personally. He happened to own an S-Corp, which was able to be attached as an asset. The article maintained if it had been an LLC, that might not have been the case.

Finally, one requirement that can not be avoided with this case is the S-Corp's requirement to pay a reasonable wage. An LLC electing to be treated as an S-Corp must still pay a reasonable salary to the owner before making distributions.

Tom


Added:

I'm finding all sorts of opinions all over the web (usually stated as fact). However, I believe:

  • Owners of an LLC are not paid as employees, but must be compensated for services as guaranteed payments (subject to SE tax). However, this does not apply to SMLLCs.

  • A SMLLC is either going to be taxed as a Sch C (all earnings subject to SE) or as an S Corp. If you elect to be taxed as an S Corp, you have to pay yourself a reasonable salary first or risk the IRS recharacterizing your distributions as salary. (This may become moot, as the IRS is supposedly contemplating closing this loophole.)

link

answered 18 Nov '09, 20:11

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Tom
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edited 24 Nov '09, 15:29

Tom where I agree with you on most counts; the LLC does not have to pay a reasonable salary since they are not officers or s/h's due to the structure. However if you a ruling to differ, then please share it with me. :)

(19 Nov '09, 19:26) SandySea
1

It was so stated by an NATP instructor: If an LLC elects to be taxed as an S Corp, it has the same reasonable salary requirements as true S Corp. It makes sense to me -- if you're electing to be taxed as an S Corp, that's what the IRS is going to see, and I would expect them to hold you to the same standards as an S Corp. But no, I have no cite offhand.

(19 Nov '09, 19:45) Tom

Correct it should be Tom, but because state law usurps the reasonable salary requirements for straight S-corp, it is not unusual to see them forego this aspect.

(24 Nov '09, 18:03) SandySea
  1. No since it is a legal entity taxed as an S-corp for tax purposes.
  2. Balance sheet items (if needed would be in equity only section...there is no stock issued to an LLC)
  3. The LLC is the entity; the taxation of it is different only.
  4. LLC is legal entity and per your state status, the LLC is primarily disregarded.
link

answered 18 Nov '09, 17:27

SandySea's gravatar image

SandySea
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With regard to Schedule L treatment, I've typically observed the LLC's capital disclosed as either paid in capital or included with retained earnings; The latter is probably the option I've witnessed the most, however!

Since there really is no "technical guidance" that I'm aware of, it appears to be a matter of "personal preference", but I would prefer to include it with retained earnings and disclose it in Schedule M-2 as a capital contribution.

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answered 18 Nov '09, 17:45

Brent%20Berkman's gravatar image

Brent Berkman
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The LLC is governed by your state's laws relating to LLCs, regardless of the tax election. However, making an S election subjects the LLC to all of the tax laws and structural restrictions applicable to S corporations.

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answered 18 Feb '10, 18:36

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Jesse
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Oh really Jesse? Then why would ANYONE be an LLC if they are afforded all the benefits of incorporation; because they don't have the same restrictions I would think :)

(18 Feb '10, 20:19) SandySea
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Asked: 18 Nov '09, 16:21

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Last updated: 18 Feb '10, 18:36