There is a tax advantage in most cases because having an entity taxed as an S corporation allows the owners to save on self-employment taxes (which are 15.3% up to $106,800 of earned income in 2009) on distributions of profits.
Because the owner of the LLC is self-employed, 15.3% of all earnings up to $106,800 in 2009 are subject to self-employment taxes. For instance, let's say that you earned $60,000 last year in your LLC. You would pay $9,180 in self-employment tax.
- $60,000 x 15.3% = $9,180
That money will go toward your Social Security and Medicaid payments. However, there is a way to earn a lucrative salary without taking a hit on all of your profits.
Let's say that you formed an LLC taxed as an S Corporation. You earn the same amount of money but pay yourself a salary of $40,000. You'll pay only $6,120 in self-employment tax. That's a tax savings of $3,060.
- $40,000 x 15.3% = $6,120
S Corporations can elect to pay the remaining $20,000 in earnings as a distribution from the company. As an LLC, you can also elect to split the profits in this manner, as long as you follow IRS guidelines. That's where the tax savings comes into play.
The IRS does not like an owner of an S corporation to limit distributions to those that are not subject to SE taxes. It is very important to take a reasonable salary when you have either an S corporation or an LLC taxed as an S corporation. A reasonable salary is the key to keeping the IRS happy.
If you want to form an LLC but want the tax advantages of an S Corporation, you'll have to get permission from the IRS by filing Form 2553. Timing is crucial, however. This form is due within 75 days of filing your new company. Miss that deadline, and you will not be able to take advantage of S Corporation tax savings.
Keep in mind that an LLC taxed as an S corporation may not be beneficial to everyone. Because you have three months to file for S Corporation tax status, make it a priority to seek professional assistance before making the final decision. For many small business owners, however, the ease of management that a Limited Liability Company offers combined with the lower taxes of an S Corporation make this decision an easy one to make.
About the Author
Written by by Scott Letourneau
http://www.nvinc.com/whybeasole.htm And Scott Letourneau Present Business Lines Of Credit And Form An LLC With Today's Topic: "How To Form a LLCTaxed as an S Corporation."
