News & Blog

By Alfred Fricano

In the fourth and final part of this blog series, we’ll explore the benefits of organizing your new business by combining the features of an LLC and an S corporation.

There are certainly benefits of establishing your business as an LLC, but then electing to have it treated as an S corporation by the IRS for tax purposes.

Potential benefits

To accomplish this, you'll have to make the special election with the IRS using Form 2553. It's no more difficult than setting up a corporation and then electing S corporation status. But it may have some added benefits, like:

• From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration - fewer filings, fewer forms, fewer start-up costs, fewer formal meetings and record keeping requirements.
• From a tax perspective, your enterprise will be treated as an S corporation. You'll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.
• Without the administrative hassles of actually being a corporation, you will still benefit from the IRS treating your business as one. To the IRS, your business will exist separate and independent from you, its owner. Therefore, the business entity can pay wages and salaries to you or to other owners. This amount will be subject to FICA tax and other withholding requirements. But then, it can distribute the remaining net earnings to you and the other owners as passive dividend income, not subject to SECA tax.
• Being treated as an S corporation may provide opportunities for tax planning to minimize the overall tax liability for your business and you as an individual. It may allow your business to take advantage of better tax treatment for certain fringe benefits, too.

Consider the pros and cons

Obviously, you need to carefully consider the pros and cons of different forms of business organization. Be sure to consider how all the aspects - legal, tax and operational - of each organizational form will impact your unique business enterprise.

Setting up an LLC and then electing treatment as an S corporation may just give you the best of both worlds - the ease of administration of the LLC and the tax planning opportunities of the S corporation.

Seeking professional advice from a CPA or tax attorney is always a wise practice when making choices like this that can affect your business for many years to come.