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As an LLC with one owner, I had the option of filing using Schedule C on my household taxes, effectively treating business income (in this case, losses) as I would a sole proprietorship. My plan had been to convert to S-Corp tax treatment, but if I can already file using Schedule C, is there really a point? Are there any advantages to the S-Corp I'm not considering?
Thanks!

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S-Corp are taxed very different. Unlike LLC where you just add the profit to your income with S-Corp you have to pay yourself a "reasonable" salary (on w-2) which of course is a lot more paperwork. I think the advantage (but don't hold me accountable for this) is if your S-Corp makes a lot more than a reasonable salary, then the rest of the money can be passed through on your personal return at a lower (corp) rate.

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    The last part here is definitely wrong. The corporate tax rate is irrelevant to this question. The pass through happens, but then you pay at your personal rate. The advantage is that you don't pay social security and medicare on what's passed through - only on "reasonable salary." – user32479 Oct 22 '15 at 13:57
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Be careful of the other answers here. Many are wrong or partially wrong.

The question implies that you knew this, but for everyone else's benefit, you can keep you LLC organization and still elect to be treated as a S-Corp by the IRS just for tax purposes. You do this by filing Form 2553 with the IRS. (You can also, by the way, elect to be taxed as a "regular" C-Corp if you want, although that's probably not advantageous. See Form 8832.)

The advantage of electing to be treated as an S-Corp is that income beyond what constitutes a "reasonable salary" are not subject to social security and medicare taxes as they would when paid was wages or counted as self-employment income on Schedule C. Depending on what you need to pay yourself to meet the "reasonable salary" test, your overall income, and other factors about your business, this could result in tax savings.

Contrary to other answers here, making this election will not force you to create a board of directors. You are still an LLC for all purposes except taxes, so whatever requirements you had in organization and governance at the state level will not change. You will have to file a "corporate" tax return on Form 1120S (and likely some corresponding state tax form), so that is additional paperwork, but this "corporate" return does not mean the S-Corp pays taxes itself. With a couple of exceptions, the S-Corp pays no taxes directly (and therefore does not pay at the corporate tax rate). Instead the S-Corp apportions its income, expenses, and deductions to the owner(s) on Schedule K. The owners get their portion reported from the S-Corp on Schedule K1 and then include that on their personal Form 1040 to pay tax at their personal rate.

In addition to filing Form 1120S, you will have to handle payroll taxes, which will create some additional administrative work and/or cost. Using a payroll service for this will likely be your best option and not terribly expensive. You've also got the issue of determining your reasonable salary within the rules, which is the subject of other questions on this site and other IRS guidance.

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I'm assuming that when you say "convert to S-Corp tax treatment" you're not talking about actually changing your LLC to a Corporation.

There are two distinct pieces of the puzzle here.

First, there's your organizational form. Your state, which is where the business is legally formed and recognized, creates the LLC or Corporation. "S-Corp" doesn't come into play here: your company is either an LLC or a Corporation. (There are a handful of other organizational types your state might have, e.g. PLLC, Limited Partnership, etc.; none of these are immediately relevant to this discussion).

Second, there's the tax treatment you receive by the IRS.

If your company was created by the state as an LLC, note that the IRS doesn't recognize LLCs as a distinct organizational type: you elect to be taxed as an individual (for single member LLCs), a partnership (for multiple member LLCs), or as a corporation. The former two elections are "pass through" -- there's no additional level of taxation on corporate profits, everything just passes through to the owners. The latter election introduces a tax on corporate profits. When you elect pass-through treatment, a single-member LLC files on Schedule C; a multiple-member LLC will prepare a form K-1 which you will include on your 1040.

If your company was created by the state as a Corporation (not an LLC), you could still elect pass-through taxation if your company qualifies under the rules in Subchapter S (i.e. "an S-Corp"). States do not recognize "S-Corp" as part of the organizational process -- that's just a tax distinction used by the IRS (and possibly your state's tax authorities).

In your case, if you are a single-member LLC (and assuming there are no other reasons to organize as a corporation), talking about "S-Corp tax treatment" doesn't make any sense. You'll just file your schedule C; in my experience it's fairly simple.

(Note that this is based on my experience of single- and multiple-member LLCs in just two states. Your state may have different rules that affect state-level taxation; and the rules may change from year to year. I've found that hiring a good CPA to prepare the forms saves a good bit of stress and time that can be better applied to the business.)

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In the United States, with an S-Corp, you pay yourself a salary from company earnings. That portion is taxed at an individual rate. The rest of the company earnings are taxed as a corporation, which often have great tax benefits. If you are making over $80K/year, the difference can be substantial. A con is that there is more paperwork and you have to create a "board" of advisors.

  • The S-Corp is not taxed as a corporation. That's the whole point of distinguishing it for a "regular" C-Corp. – user32479 Oct 22 '15 at 13:59
  • I never suggested an S-Corp was NOT taxed as a corporation. I said that a salary paid to an employee by an S-Corp was taxed at an individual rate. – Ash Machine Oct 28 '15 at 19:32
  • The S-Corp is not taxed as a corporation. You said "The rest of the company earnings are taxed as a corporation, which often have great tax benefits." This sentence is not true. The "rest of the earnings" are attributed to the owners and also taxed at the individual rates of the owners. – user32479 Oct 29 '15 at 19:43

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