“LLC or S corp?” mixes two decisions. One is legal: what entity exists, decided with your state. The other is tax: how the IRS taxes it, which has a default you can change by election. S corporation status is the second kind.
The two decisions
- Entity, under state law: sole proprietorship, partnership, LLC or corporation. Filed with your state (nothing, for a sole proprietorship).
- Federal tax treatment, under IRS rules: the default, or an election to be taxed as a corporation or S corporation. Filed with the IRS.
Default federal tax treatment
- Sole proprietorship: income goes on the owner’s personal return.
- LLC with one member: part of the owner’s return (a “disregarded entity”) for income tax, but separate for employment and certain excise taxes.
- LLC with two or more members: taxed as a partnership unless it elects to be taxed as a corporation.
- Corporation: pays income tax on its profits. This is a C corporation.
An LLC changes its classification with Form 8832. For S corporation treatment it files Form 2553 instead and, if it meets the tests, doesn’t need Form 8832.
What S corporation status changes
An S corporation passes income, losses, deductions and credits through to its shareholders, who pay at their individual rates. That avoids the C corporation’s entity-level tax, except on certain built-in gains and passive income.
To qualify, the business must:
- be a domestic corporation, or an LLC that elects to be taxed as one;
- have only allowable shareholders: individuals, certain trusts and estates, and no partnerships, corporations or nonresident aliens;
- have no more than 100 shareholders;
- have only one class of stock;
- not be an ineligible corporation, such as certain financial institutions and insurance companies.
All shareholders sign Form 2553. It’s due no more than 2 months and 15 days after the start of the tax year it should apply to.
How to decide
- Pick the entity first, for liability and cost: Pick an entity, then your state’s Register your business page.
- Run the tax question with real numbers. Whether an S election saves money depends on your profit, your pay and your state’s rules. Ask a CPA before the deadline.
- Mind the calendar. The 2 months and 15 days window starts at the beginning of the tax year.
State tax is separate
Most states follow the federal election. Some tax S corporations on profit above a limit, and a few don’t recognize the election at all. Your state’s tax agency has the rule.
This step, state by state
Common questions
Can a single-member LLC be an S corp?
Yes, if it's eligible. It files Form 2553 and, if it qualifies, doesn't also need Form 8832.
Can a sole proprietor elect S corp status?
No. You'd form an LLC or corporation with your state first, then file Form 2553.
Do I need a new EIN if my LLC elects S corp status?
No. Per the IRS, changing an LLC's or corporation's tax election to S corporation doesn't require a new EIN.
What is the deadline to elect S corp status?
Generally no more than 2 months and 15 days after the start of the tax year it applies to. The IRS has relief rules for some late elections.
Do I file anything with my state to become an S corp?
Not for the federal election, which goes to the IRS on Form 2553. States treat S corporations differently for state tax, so check yours.