An LLC is not automatically an S corporation
A limited liability company is formed under state law. Depending on its ownership and elections, it may be treated for federal tax purposes as a disregarded entity, partnership, C corporation or S corporation. The legal entity does not disappear when an eligible LLC elects S corporation treatment.
Why businesses consider the election
An S corporation separates owner wages from qualifying business profit for certain federal employment-tax purposes. That potential difference is why the election is frequently discussed—but it does not mean every profitable business should elect it.
Reasonable compensation and payroll
An owner performing services for an S corporation generally must address reasonable compensation and payroll compliance. The business may need regular payroll, payroll deposits, quarterly and annual filings, wage statements, unemployment accounts and coordination with a payroll provider.
Administrative cost matters
- Separate business tax-return preparation
- Payroll processing and payroll-tax filings
- More formal bookkeeping and balance-sheet records
- Tracking shareholder contributions and distributions
- Basis, debt and ownership considerations
- State filing and tax requirements
The comparison should use realistic numbers
Expected profit, reasonable compensation, payroll cost, retirement goals, health-insurance treatment, state taxes and the quality of the books all affect the result. A comparison should include the additional compliance cost—not only a projected tax difference.
Make the decision before building the workflow
The best time to evaluate the election is before year-end payroll and recordkeeping become urgent. AllTax can help review the tax and recordkeeping considerations and coordinate with payroll or other professionals when appropriate.