When you start your new limited liability company (LLC) and get an EIN from the IRS, you may elect to be taxed as an S-Corp. In most case you should file that election. The Form is 2553.
The default way for new businesses to be taxed at the federal level is either:
- If you are the only owner, the company will be disregarded and you’ll report the company’s income a Schedule C of your personal return. You’ll have to pay self-employment tax on the entire net income, whether you withdraw the funds from the company or not.
- If you have one or more partners, the company will have to file an informational tax return, but again all of the net income will flow through to the owners and you’ll have to pay self-employment tax on all of it.
But if you elect S-Corp filing status, you (and your partners) may be employees of the company and collect a salary, which is deductible to the company. Any net income you leave in the company will not be subject to FICA. Not having to pay FICA on $10,000 retained earnings saves your company approx $1500 that could be used to pay for marketing (or to hire a lawyer-HA!).
Another reason to elect S-Corp status: You can compensate owners who work in the company at rates that differ from the percentage ownership. You can do that with the default taxation models.
The only reason not to take advantage of the S-Corp status may be in situations where the company’s only income is passive, as when your company’s purpose is to hold investments.
So go ahead and create your LLC, then immediately file the IRS Form 2553 to elect S-Corp taxation status.
Does your company have an operating agreement? If not, learn why you should have an operating agreement when forming your new company as an LLC!
Entrepreneurs are going to save the world, and Argent Place Law wants to help. That’s why we are a team of entrepreneur-lawyers to Entrepreneurs just like you. Think how great will it be to have a legal team with entrepreneurial experience on your speed dial so you can call us up and ask, “I want to start a new business, should my new company be an LLC or an S-Corp ?” Call Argent Place Law to find out.