Developer · New York, NY · Member since 2016 · 50 posts · 7 votes
If an LLC elects to be taxed as an S-Corporation, what are the specific tax provisions that would need to be included in the Operating Agreement in order for that tax status to hold in court down the road? Thanks
LLCs can elect to file as C corps or S corps. You just have to file a document called in election with the IRS.
You can file form 2553 with the IRS to elect for S corp treatment. You can't have more than 100 shareholders. None of the shareholders can be non-resident aliens (non US citizens living outside the US). None of the other entities or shareholders can be other corporations or partnerships. An you can only have one class of stock.
You will be treated as a shareholder and an employee at the same time. You don't pay social security or medicare on money that stays within the LLC. You only pay taxes on the amount that pass thru to you as a salary. You do have to pay yourself a reasonable salary. If you don't file the S corp status, then you'll have to pay the employment tax.
Any flippers in your area that can recommend a better tax professional or lawyer?
Why are you doing this? A LLC and S-Corp both "flow through" taxes to a single owner in much the same way, is it because you want to save the few hundred dollars in filing fees per year? If you are doing any sizable business you'll want a CPA to do your taxes for you, in my opinion I would just be a S-corp to start with!
For my S-corp, I just used an online place such as form-a-corp or legalzoom to make sure the paperwork was done properly, I advise you to do the same and consult a CPA or attorney.
Reading articles like this, make it sound like there isn't much difference to me:
I Have a specific question about this topic as well and I am hoping someone with experience can chime in. I just sat down with my CPA and it looks like I've made approximately $160k in gross income through my LLC this year, pretty much all of this income has come from flips. Is it possible for my LLC to be taxed as an S Corp to mitigate my California Gross Receipts Tax ($6000) and self-employment tax ($22,000)? Here are a couple caveats:
1. This is my second year in business, last year I did not generate any income via the LLC and did not see the need to elect to be taxed as an S Corp
2. I own 2 rental properties one of which is in my name the other is in the LLC's name but will be transferred back to my name once I secure long-term financing in 5 more months.
3. I asked my CPA about this specifically and he said that he has not seen it done before which seemed a little weird to me. He's recommending that I pay the taxes as an LLC this year and form a separate S Corp for my flipping business moving forward.
Any advice or feedback would be much appreciated. Thanks
LLCs can elect to file as C corps or S corps. You just have to file a document called in election with the IRS.
You can file form 2553 with the IRS to elect for S corp treatment. You can't have more than 100 shareholders. None of the shareholders can be non-resident aliens (non US citizens living outside the US). None of the other entities or shareholders can be other corporations or partnerships. An you can only have one class of stock.
You will be treated as a shareholder and an employee at the same time. You don't pay social security or medicare on money that stays within the LLC. You only pay taxes on the amount that pass thru to you as a salary. You do have to pay yourself a reasonable salary. If you don't file the S corp status, then you'll have to pay the employment tax.
Any flippers in your area that can recommend a better tax professional or lawyer?
@Christopher Phillips You hit the nail on the head. By electing to be taxed as an S-corp I'm both a shareholder and an employee. Plus if we take distributions out we do not pay employment taxes. Salary tax is 15.3% which is fine. My partner and I have an LLC taxed as an S-corp and did file the 2553.
My question is more on the actual operating agreement. Hoping that a real estate attorney on this platform can provide some color on whether there needs to be specific provisions in the operating agreement related to an S-corp.