Can an LLC Be Taxed as an S Corporation?

Q: Eligibility Requirements for S Corp Election

To be eligible to elect S corporation tax status, your LLC must be a domestic entity, have only allowable shareholders, have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation.

Q: How to Make the Election

To elect S corporation tax treatment, your LLC must file IRS Form 2553, “Election by a Small Business Corporation,” within 75 days of forming the LLC or the start of the tax year in which the election is to take effect.

Q: Ongoing Requirements and Responsibilities

Once your LLC is taxed as an S corporation, you must pay reasonable salaries to owner-employees, file an S corporation tax return each year, provide shareholders with a Schedule K-1, and maintain payroll records.

Q: When Is S Corp Election a Good Idea?

Electing S corp status is worth considering if your business generates consistent profits, has owners who actively work in the business, and can afford to run payroll and maintain detailed accounting.

Yes, an LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS, as long as it meets certain eligibility requirements.

By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. However, the IRS allows LLCs to choose how they are taxed, including electing S corporation status. This is a popular option for growing businesses that want to reduce self-employment taxes while retaining the legal and operational flexibility of an LLC.

Contents

What Is an S Corporation?
Why Would an LLC Elect S Corp Tax Status?
Eligibility Requirements for S Corp Election
How to Make the Election
Ongoing Requirements and Responsibilities
When Is S Corp Election a Good Idea?

What Is an S Corporation?

An S corporation (or S corp) is not a type of legal business entity. It is a tax classification under the Internal Revenue Code. Businesses that qualify can choose to be taxed under Subchapter S, which allows income, losses, deductions, and credits to pass through to shareholders while avoiding corporate income tax.

Unlike C corporations, S corporations are not taxed at the corporate level. Instead, profits are reported on each owner’s individual tax return. This pass-through taxation is similar to how LLCs are taxed by default, but with one key difference: owners can pay themselves a salary and take additional profits as distributions, which are not subject to self-employment tax.

Why Would an LLC Elect S Corp Tax Status?

Electing S corp status can provide several tax advantages for LLC owners:

Reduced Self-Employment Taxes: LLC members typically pay self-employment tax on 100% of their profits. In an S corp, only wages paid to the owner are subject to payroll taxes-additional distributions are not.
More Professional Compensation Structure: Owner-employees in an S corp receive a W-2 salary, which can look more professional to lenders and investors.
Potential Tax Savings: For businesses with significant profits, this election can save thousands of dollars annually in Medicare and Social Security taxes.

However, to benefit from S corp taxation, the LLC must follow strict IRS rules, including paying owners a “reasonable salary” for their work in the business.

Eligibility Requirements for S Corp Election

Not every LLC qualifies to elect S corporation tax status. To be eligible, your LLC must:

Be a domestic entity
Have only allowable shareholders (individuals, certain trusts, and estates)
Have no more than 100 shareholders
Have only one class of stock (membership interests must be equal in rights)
Not be an ineligible corporation (such as certain financial institutions or insurance companies)

Most small LLCs meet these requirements, but it’s important to verify eligibility before filing the election.

How to Make the Election

To elect S corporation tax treatment, your LLC must file IRS Form 2553, “Election by a Small Business Corporation.” The form must be signed by all members and submitted by:

Within 75 days of forming the LLC, or
Within 75 days of the start of the tax year in which the election is to take effect

Missed the deadline? In some cases, the IRS allows late election relief if you have a reasonable cause and can show you intended to be treated as an S corp.

Ongoing Requirements and Responsibilities

Once your LLC is taxed as an S corporation, you must follow certain administrative rules:

Pay reasonable salaries to owner-employees and issue W-2s
File an S corporation tax return (Form 1120-S) each year
Provide shareholders with a Schedule K-1
Maintain payroll records and remit employment taxes

Failure to meet these requirements could cause the IRS to revoke your S corp status or impose penalties. Many S corp LLCs choose to work with accountants or payroll providers to stay compliant.

When Is S Corp Election a Good Idea?

Generally, electing S corp status is worth considering if your business:

Generates consistent profits above $40,000–$50,000 annually
Has owners who actively work in the business
Can afford to run payroll and maintain more detailed accounting

For very small or early-stage businesses, the extra complexity may outweigh the tax savings. But for profitable LLCs, the S corp election can significantly reduce the tax burden and help preserve more income for growth.

Yes, an LLC can be taxed as an S corporation, and doing so may reduce self-employment taxes and offer additional financial advantages. The process is relatively simple but requires ongoing compliance with IRS rules and payroll regulations. If you’re considering the S corp election, it’s wise to consult a tax advisor to evaluate the pros and cons for your specific situation and ensure you stay on the right side of IRS requirements.