LLC Tax Election-What is it?
The LLC tax election tells the IRS how to tax your Limited Liability Company (LLC.) After the LLC was developed in the 1970’s, Congress did not define how it should be taxed. As a result, the Federal Government does not recognize the LLC as a classification for Federal Tax purposes. Instead the Congress gave you the opportunity to choose how you wish to be taxed. You can be taxed as a sole proprietorship, a partnership, a corporation or an S corporation. To ensure your choice, you have to make an election on how your LLC will be taxed.
Choosing how you wish to have your LLC taxed is usually an accounting decision that you make with your CPA. The important thing is that you make the election with in 90 days or you will default and be taxed the way the IRS chooses, which will be either a sole proprietorship or a partnership.
You can choose to be a C or S corporation. One of the best features of the S-Corp is the tax savings for you and your business. Members of an LLC taxed as a partnership or sole proprietorship are subject to employment tax on the entire net income of the business and they must pay the social taxes on that amount. Only the wages of the S-Corp shareholder, who is an employee, are subject to employment tax. The remaining income is paid to the owner as a ‘distribution’ which is taxed at a lower rate and does not require social taxes.
Most people like to make their own tax election, once they understand the options. Many miss the ability to make this choice because they don’t know about it.
LLC Tax Election- How to make it.
The election with the IRS to have the LLC taxed as an S-Corp or Corporation is made by filing Form 2553 or Form 8832 with the IRS depending upon your election. You must file your election before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. If the LLC does not enter a date, the election will be in effect as of the form’s filing date.
Your election cannot take place more than 75 days prior to the date that you file the LLC. However, if the election is the “initial classification election,” and not a request to change the entity classification, there is a possibility for a late election.
When you make an election the form ends with a consent statement which may be signed by all members, or by one member on behalf of all members. If one member signs, there should be some record in company membership meetings that all members approved this election. The name or names and identifying numbers of the members must also be included.
The important thing about the LLC tax election is knowing what to do and when. The same is true with many other LLC management actions. As a professional, I interview far too many people who do not understand what they needed to do and when. They are in trouble and I must bail them out. It is generally an expensive painful process. I created the LLC Wizard to help prevent these problems. If you have questions about your LLC take a look at one of our LLC Wizard Packages. It can help you prevent problems and save money.