{"id":1104,"date":"2018-06-27T16:16:34","date_gmt":"2018-06-27T16:16:34","guid":{"rendered":"https:\/\/www.bfvlaw.com\/review-your-operating-agreement-if-electing-s-corporation-tax-treatment-for-your-llc\/"},"modified":"2022-08-08T19:51:34","modified_gmt":"2022-08-08T19:51:34","slug":"review-your-operating-agreement-if-electing-s-corporation-tax-treatment-for-your-llc","status":"publish","type":"post","link":"https:\/\/www.bfvlaw.com\/review-your-operating-agreement-if-electing-s-corporation-tax-treatment-for-your-llc\/","title":{"rendered":"Review Your Operating Agreement if Electing S Corp Tax Treatment for LLC"},"content":{"rendered":"<p>Under IRS regulations, limited liability companies (LLCs) having two or more owners will be classified as a partnership for tax purposes and LLCs having only one member will be taxed as a disregarded entity.\u00a0 However, many owners of single- or multiple-member LLCs elect S corporation tax status for the LLC once formed. This election is achieved through a simple filing of Form 2553 with the IRS.<\/p>\n<p>Oftentimes, the decision to elect <a href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/s-corporations\">S corporation<\/a> tax status is motivated by employment tax treatment for S corporations. Generally, for LLCs taxed as partnerships, the owner is treated as a business owner and not as an employee of the LLC. The effect of this is that the entire amount of a member\u2019s income which passes through from the LLC\u2019s operations will be subject to self-employment tax.\u00a0 However, for LLCs electing to be taxed as S corporations, LLC owners who also perform services for the LLC will only be subject to employment taxes on the compensation paid to the LLC owner.\u00a0 As long as the compensation paid is \u201creasonable,\u201d the S corporation status election means that the owners will not have to pay employment taxes on distributions made to LLC owners (i.e., profits paid other than those to owners as compensation for services).<\/p>\n<p>Any LLC electing to be taxed as an S corporation must adhere to the specific eligibility rules applicable to S corporations.\u00a0 These eligibility rules include the following:<\/p>\n<ul>\n<li>The LLC cannot have more than 100 members.<\/li>\n<li>The members of the LLC can only be individuals, certain trusts, and estates. Non-resident aliens cannot be members.<\/li>\n<li>The LLC can have only one class of stock.<\/li>\n<\/ul>\n<p>The requirement that the LLC may only have a single class of stock means that all members must have the same liquidation and distribution rights.\u00a0 The standard tax provisions in an <a href=\"https:\/\/www.bfvlaw.com\/llc-default-rules-that-may-surprise-you\/\">operating agreement for LLCs<\/a> taxed as a partnership would violate the single class of stock requirement.\u00a0 Most operating agreements for an LLC taxed as a partnership have provisions which would lead to distributions disproportionate to each member\u2019s ownership interest, resulting in a second class of stock for purposes of the S corporation eligibility rules. For example, a common provision in an operating agreement for an LLC taxed as a partnership would be that liquidation distributions be made in accordance with positive capital account balances (before distributing any remainder according to ownership interest).\u00a0 This provision, or any other provision allowing for priorities on distributions, would violate the single class of stock requirement.<\/p>\n<p>It is important for LLC owners electing S corporation tax status for the LLC to modify any existing operating agreements to remove the standard partnership tax provisions.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Under IRS regulations, limited liability companies (LLCs) having two or more owners will be classified as a partnership for tax purposes and LLCs having only one member will be taxed as a disregarded entity.\u00a0 However, many owners of single- or multiple-member LLCs elect S corporation tax status for the LLC once formed. This election is [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":1105,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[4,6],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Review Operating Agreement if Electing S Corp Tax Treatment for LLC<\/title>\n<meta name=\"description\" content=\"Many owners of single- or multiple-member LLCs elect S corporation tax status for the LLC once formed. It is important for LLC owners electing S corporation tax status for the LLC to modify any existing operating agreements to remove the standard partnership tax provisions.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.bfvlaw.com\/review-your-operating-agreement-if-electing-s-corporation-tax-treatment-for-your-llc\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Review Operating Agreement if Electing S Corp Tax Treatment for LLC\" \/>\n<meta property=\"og:description\" content=\"Many owners of single- or multiple-member LLCs elect S corporation tax status for the LLC once formed. 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