[{"@context":"https:\/\/schema.org\/","@type":"Article","@id":"https:\/\/moneydoneright.com\/taxes\/business-taxes\/llc-taxed-as-s-corp\/#Article","mainEntityOfPage":"https:\/\/moneydoneright.com\/taxes\/business-taxes\/llc-taxed-as-s-corp\/","headline":"LLC Taxed As S Corp: How To Make the Election + One BIG MISTAKE to Avoid!","name":"LLC Taxed As S Corp: How To Make the Election + One BIG MISTAKE to Avoid!","description":"Electing for your business to be taxed as an S corporation may offer you...","datePublished":"2022-01-11","dateModified":"2025-09-17","author":{"@type":"Person","@id":"https:\/\/moneydoneright.com\/author\/logan-allec\/#Person","name":"Logan Allec, CPA","url":"https:\/\/moneydoneright.com\/author\/logan-allec\/","identifier":4,"image":{"@type":"ImageObject","@id":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Money Done Right","logo":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","width":488,"height":60}},"image":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/LLC-Taxed-As-S-Corp.jpeg","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/LLC-Taxed-As-S-Corp.jpeg","height":460,"width":1900},"url":"https:\/\/moneydoneright.com\/taxes\/business-taxes\/llc-taxed-as-s-corp\/","video":{"@context":"http:\/\/schema.org\/","@type":"VideoObject","@id":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4#VideoObject","contentUrl":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4","name":"What Is an S Corporation and Does It REALLY Save You on Taxes?","description":"Some tax pros say you should always set up an S Corp for your business once you reach a certain income level. They aren't giving you the full picture. Logan Allec, CPA, explains exactly how an S Corp saves you on taxes, situations where an S Corp is NOT a good idea, and the advantages and disadvantages of having an S Corp. Plus, he has info about a company called Collective that can handle S Corp details for you.\n\n\u25ba Collective (Use Coupon Code LOGAN for 50% Off Your First 2 Months!): https:\/\/moneydoneright.com\/collective\/\n\nWatch Next:\n\u25ba What Is an LLC: https:\/\/youtu.be\/6OAdA1EX9pg\n\u25ba My $1,000\/Hour Side Hustle: https:\/\/youtu.be\/qe7MWhx-e1A\n\nTable of Contents:\n0:00 What Is an S Corporation?\n0:57 Intro to Collective + Promo Code LOGAN\n1:36 How to Set Up an S Corp\n2:24 Tax Benefits of an S Corp\n3:12 Example: Tax Liability for Sole Proprietor vs. S Corp\n7:13 Additional Costs of Having an S Corp\n7:50 Situations When Having an S Corp Is a Bad Idea\n11:47 Advantages of Having an S Corp\n12:53 Disadvantages of Having an S Corp\n14:34 How to Decide About Having an S Corp\n14:50 How Collective Can Help\n\n#smallbusiness #soleproprietor #scorp","thumbnailUrl":["https:\/\/i.ytimg.com\/vi\/BUxh3UO2CG4\/default.jpg","https:\/\/i.ytimg.com\/vi\/BUxh3UO2CG4\/mqdefault.jpg","https:\/\/i.ytimg.com\/vi\/BUxh3UO2CG4\/hqdefault.jpg","https:\/\/i.ytimg.com\/vi\/BUxh3UO2CG4\/sddefault.jpg","https:\/\/i.ytimg.com\/vi\/BUxh3UO2CG4\/maxresdefault.jpg"],"uploadDate":"2022-01-05T16:19:06+00:00","duration":"PT15M47S","embedUrl":"https:\/\/www.youtube.com\/embed\/BUxh3UO2CG4","publisher":{"@type":"Organization","@id":"https:\/\/www.youtube.com\/channel\/UCzA84e3FApVVKBYYNULpa1w#Organization","url":"https:\/\/www.youtube.com\/channel\/UCzA84e3FApVVKBYYNULpa1w","name":"Money Done Right","description":"Money Done Right is a YouTube channel and blog devoted to reviewing financial products and apps and sharing top, expertly-created information about personal finance, making money, saving money, credit, and taxes.","logo":{"url":"https:\/\/yt3.ggpht.com\/dRgbuNmzeO8mz6tpXMMcaSoAQ3nEPYspoFqkr-t9WqzkN-2uB0PkulpTg1gpR0lihZpdtawo=s800-c-k-c0x00ffffff-no-rj","width":800,"height":800,"@type":"ImageObject","@id":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4#VideoObject_publisher_logo_ImageObject"}},"potentialAction":{"@type":"SeekToAction","@id":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4#VideoObject_potentialAction","target":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4&t={seek_to_second_number}","startOffset-input":"required name=seek_to_second_number"},"interactionStatistic":[[{"@type":"InteractionCounter","@id":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4#VideoObject_interactionStatistic_WatchAction","interactionType":{"@type":"WatchAction"},"userInteractionCount":244}],{"@type":"InteractionCounter","@id":"https:\/\/www.youtube.com\/watch?v=BUxh3UO2CG4#VideoObject_interactionStatistic_LikeAction","interactionType":{"@type":"LikeAction"},"userInteractionCount":12}]},"about":["Business Taxes"],"wordCount":1156,"articleBody":"Electing for your business to be taxed as an S corporation may offer you tax savings on Social Security and Medicare taxes.Perhaps the easiest way for a new business to be taxed as an S corporation is for the owner(s) to form an LLC for their business with their state’s secretary of state and then for this LLC to file Form 2553 with the Internal Revenue Service (IRS) as well as, if required by their state, any state S corporation paperwork with their state’s revenue department.However, if business owners go this route for electing S corporation status for their business, they should be aware of a major pitfall that could completely invalidate their S corporation election.Learn how an LLC can be taxed as an S corporation and what business owners considering this move should watch out for.Want to learn more basics about S corporations?  Watch the video below or read this article!Table of ContentsToggleHow LLCs Are Taxed by DefaultSingle-Member LLCsMulti-Member LLCsShould You Elect S Corp Status For Your LLC?LLC Taxed As S Corp ProsLLC Taxed as S Corp ConsHow to Elect S Corp Status For an LLC (Step-by-Step)Step 1: If you haven’t already, form your LLC.Step 2: File Form 2553 and any required state forms.Step 3: File your state S corporation election (certain states only).Step 4: Set up payroll.Step 5: Look out for the CP261 Notice.A Major Pitfall in Your LLC Operating AgreementHow LLCs Are Taxed by DefaultHow an LLC is taxed by default depends on whether it’s a single-member LLC or a multi-member LLC.Single-Member LLCsLLC owners are called “members,” so a single-member LLC only has one owner.Single-member LLCs are “disregarded entities” for federal income tax purposes, meaning that the IRS essentially ignores the LLC for income tax purposes.This means that the single-member LLC’s owner reports the LLC’s income, deductions, and other tax items on their own tax return as though the LLC did not exist.Multi-Member LLCsMulti-member LLCs have more than one owner and are taxed as a partnership by default.This means they must file Form 1065 with the IRS and issue Schedule K-1s to all members of the LLC..simple_table-47684 table tr th{\ttext-align: center;\t\t}.simple_table-47684 table tr td{\ttext-align: center;\t\t}Single-Member LLCMulti-Member LLCHas one and only one ownerHas more than one ownerIgnored for federal income tax purposes by defaultTaxed as a partnership by defaultDoes not file a federal income tax return with the IRSFiles Form 1065 with the IRSMay be liable for state taxes and fees, depending on the stateMay be liable for state taxes and fees, depending on the stateMay have to file a state tax returnMust file a state partnership tax returnShould You Elect S Corp Status For Your LLC?Electing S corporation status may — or may not — provide tax benefits for you.Although this article gives a more complete picture of the advantages and disadvantages of electing S corporation status for your business, here are some of the major pros and cons.LLC Taxed As S Corp ProsPotential Tax Savings: Forming an S corporation could save you money on Social Security and Medicare taxes.  Here’s an example how.Possibly Less Audit Risk: S corporation returns (Form 1120S) are audited at a lower risk than Schedule Cs.LLC Taxed as S Corp ConsMore Complex Tax Situation: Since S corporations are required to file their own tax return(s), they naturally increase the complexity of their owners’ tax situation.More Administrative Fees: Setting up an S corporation means more administrative fees such as payroll costs and annual secretary of state filing fees.Read this article for more information about the pros and cons of S corporations in general.S Corporations Are Not Legal Entities.S corporations are a creation of Internal Revenue Code \u00a7 1362.\u00a0 For legal purposes, however, your LLC is still an LLC.\u00a0 Making an S corporation election only has ramifications in the world of income taxes!How to Elect S Corp Status For an LLC (Step-by-Step)Here’s how to elect S corporation status for an LLC in just a few steps.Step 1: If you haven’t already, form your LLC.State-by-state rules vary here, but check out this article for the general steps.Step 2: File Form 2553 and any required state forms.The next step is to file Form 2553 with the IRS no later than two months and 15 days from the beginning of the tax year you want your S corporation election to be effective for.  If you miss this deadline, late S corporation election relief is available.Note that your LLC may, optionally, file Form 8832 prior to filing Form 2553 in order to first elect to be taxed as a corporation.However, this is not necessary because according to Treasury Regulations \u00a7 301.7701-3(c)(1)(v)(C), an entity (such as an LLC) that makes a valid, timely-filed S corporation election is automatically deemed to have elected to be taxed as a corporation on the effective date of its S corporation election.Read this article to learn more about filing Form 2553.Step 3: File your state S corporation election (certain states only).If your state is one of the few states that requires a separate S corporation election, you will need to file an S corporation election with your state as well.Step 4: Set up payroll.If you are working in your business day in and day out, your S corporation will have to pay you a reasonable salary.This means you will have to set up payroll for your S corporation.You could, of course, do this by hand or pay a local tax professional, but I personally use Gusto to handle my own S corporation’s payroll.Step 5: Look out for the CP261 Notice.CP261 is the approval notice that the IRS will send your LLC to notify it that it has approved its S corporation election.Once you receive this notice, save it in your files.I would recommend scanning it and keeping an electronic backup as well.A Major Pitfall in Your LLC Operating AgreementMany business owners who elect for their LLC to be taxed as an S corporation make a big mistake when it comes to their LLC’s operating agreement — especially if they draft their own operating agreement or use boilerplate language they found online.However, some language in an LLC’s operating agreement could cause the IRS to invalidate the LLC’s S corporation election — if the IRS finds out about it, of course.The kind of language I’m talking about is language that could be interpreting to imply that the LLC has multiple classes of stock.See, one of the S corporation requirements is that the business entity has only one class of stock.So if an LLC operating agreement, say, references any kind of disproportionate distributions to LLC members or special classes of LLC shares, that could cause the LLC’s S corporation to become invalidated."},{"@context":"https:\/\/schema.org\/","@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Taxes","item":"https:\/\/moneydoneright.com\/taxes\/#breadcrumbitem"},{"@type":"ListItem","position":2,"name":"Business Taxes","item":"https:\/\/moneydoneright.com\/taxes\/\/business-taxes\/#breadcrumbitem"},{"@type":"ListItem","position":3,"name":"LLC Taxed As S Corp: How To Make the Election + One BIG MISTAKE to Avoid!","item":"https:\/\/moneydoneright.com\/taxes\/business-taxes\/llc-taxed-as-s-corp\/#breadcrumbitem"}]}]