Can a Single Member LLC Be an S Corp?

A single-member limited liability company (LLC) can be taxed as an S corporation, blending the legal protections of an LLC with a different tax structure. By default, the Internal Revenue Service (IRS) treats a single-member LLC as a “disregarded entity,” meaning its financial activity is reported on the owner’s personal tax return. An S corporation is a tax classification that also passes profits and losses to the owner’s personal income, but with key differences in how that income is treated for tax purposes.

S Corporation Eligibility Requirements

To qualify for S corporation tax treatment, a single-member LLC must satisfy several IRS requirements. The business must be a domestic entity organized within the United States. The owner must be an eligible shareholder, which includes individuals, certain trusts, and estates, but not partnerships, corporations, or non-resident aliens.

An S corporation cannot have more than 100 shareholders and is restricted to only one class of stock. A single-member LLC naturally meets these last two requirements.

Key Tax Implications of the S Corp Election

The primary tax benefit of an S corp election for a single-member LLC relates to employment taxes. As a disregarded entity, all net profit is subject to self-employment taxes for Social Security and Medicare. When taxed as an S corp, the owner must be classified as an employee and paid a reasonable salary for their services. This salary is subject to FICA taxes, which are partially paid by the business and partially withheld from the owner’s paycheck.

Any profit remaining after the salary and other business expenses are paid can be given to the owner as a distribution. These distributions are not subject to FICA or self-employment taxes. This separation of income into salary and distributions can reduce the owner’s overall employment tax burden. The IRS requires the salary to be “reasonable” for the work performed, and setting an unreasonably low salary can lead to penalties.

Making the S Corp Election

Making the S corp election is a two-step process. First, the LLC must elect to be treated as a corporation for tax purposes by filing Form 8832, “Entity Classification Election.” The business must then file Form 2553, “Election by a Small Business Corporation,” to be treated as an S corporation.

Before filing, the owner needs the business’s legal name, address, Employer Identification Number (EIN), formation date, and state of formation. An EIN is required and can be obtained from the IRS website if the business does not already have one.

Filing the Election Forms

The forms must be filed with the IRS within a specific timeframe. For the election to take effect in the current tax year, Form 2553 must be filed no later than two months and 15 days after the beginning of that tax year. For a new LLC, the deadline is two months and 15 days from its formation date. If these deadlines are missed, the election becomes effective for the following tax year.

The forms can be submitted by mail or fax. If the election is approved, the IRS sends a confirmation notice, often a CP261 Notice, within about 60 days, which confirms the effective date. If this notice is not received, the business owner should contact the IRS. If the original notice is lost, the owner can request a substitute letter from the IRS as proof of the election.

Ongoing Compliance for an S Corp

A formal payroll system must be established to process the owner’s reasonable salary. This involves withholding federal income taxes and the employee’s share of FICA taxes from each paycheck. The business is also responsible for paying the employer’s share of FICA taxes. The company must also file quarterly payroll tax returns, such as Form 941, and an annual federal unemployment tax return on Form 940.

The business must file a separate annual income tax return on Form 1120-S, which reports the company’s financial activity. From this return, the S corporation prepares and provides a Schedule K-1 to the owner. The Schedule K-1 details the owner’s share of the business’s financial results. The owner then uses this information to report the income or loss on their personal Form 1040 tax return.