Limited Liability Companies (LLCs) are a popular choice of business entity among small business owners. This is because a multi-member LLC combines the limited liability of a corporation with the tax flexibility of a partnership. There may be times, however, when LLC members choose to make an S Corporation election. Before that happens, it is important to review the LLC operating agreement to make sure it conforms to the S Corporation eligibility requirements.
It is also important to consider all the tax implications of electing S Corporation status. For example, an S Corporation recognizes gain when it distributes appreciated property to shareholders. On the other hand, the distribution of appreciated property from an LLC normally results in no gain recognition.
Two of the most common reasons for electing S Corporation status are (1) reduction of self-employment tax and (2) planning for the 20% Qualified Business Income deduction. Reach out to us with any questions you have about the potential tax savings of electing S Corporation status and whether it would be right for your business!