Many people ask whether a single-member LLC taxed as S corporation is a good play? This article discusses when it is appropriate to have an LLC taxed as S corporation, and how to accomplish this task.
By default, a single-member LLC is a “disregarded” entity, that is, the entity is ignored by the IRS and the sole member is the taxpayer. Thus, an individual as a sole member running a business would be taxed on his personal return as a schedule C, sole proprietor. Many businesses run this way, which has no tax advantages and high risk of audit.
Most tax professionals would recommend running an operating business (especially with employees) as an S corporation.
But, what if you already formed an LLC? No worry, you can convert the LLC for federal income tax purposes to an S corporation. This involves several steps:
1. Get a federal tax ID# from the IRS.
2. File IRS form 8832 to choose an entity election as a corporation
3. File an S corporation election form (IRS form 2553)
4. Amend your operating agreement to allow for the new taxation rules (or, if you don’t have one at all, CREATE an operating agreement).
This may require the assistance of a tax advisor and/or attorney to complete, depending on how comfortable you are with the forms and documentation.
The next issue is whether you have to ACT like a corporation for tax purposes even though the state LLC laws may not require it? For example, do you need to issue stock certificates, have annual meetings and resolutions like a corporation. While the state may say “no”, the IRS auditor may say YES! So, even though you like the informality of an LLC, you still may need to issue certificates and keep annual minutes and document resolutions for all activity your LLC does that is out of the ordinary course of business (such as large purchases or leases, loans in and out, etc).
A Colorado LLC taxed as S corporation can be a good idea if you already have a single member LLC that is disregarded and your accountant informed you that an S corporation will be better for tax purposes. If you need to convert your disregarded single member LLC into an LLC taxed as S corporation, please contact our office for assistance. We charge a nominal fee to get you a new tax ID, file the appropriate IRS forms, and prepare the new operating agreement.