Business Entity


If your business is incorporated as a C corporation or an LLC and you’re considering a change to an S corporation, there are a number of important tax issues you should be aware of. While there are certain tax advantages associated with S corporations, S corporations are also taxed at the highest corporate rate — currently 35 percent. If your company is incorporated or intends to incorporate as a Limited Liability Company (LLC), you can choose to be treated as either a C corporation or a Subchapter S corporation. Both require different forms while electing treatment as a Subchapter S corporation specifically requires that you complete Form 2553. Failure to complete Form 2553 could result in the IRS treating your company as a C corporation and in your business paying thousands of dollars more in taxes.

The tax code can be complicated and confusing. If you own a business or are in the process of starting one and would like to incorporate as an S corporation, contact Woodbury tax attorneys at the Stefans Law Group today to schedule an appointment to learn how we can help you.

C Corporations Electing S Corporation Status

When electing S corporation status, C corporations should make every effort to carefully plan ahead. Here, it’s important to remember that Congress enacted the built-in gains (BIG) tax in order to prevent C corporations from using S corporation status to circumvent a double tax assessed on corporate liquidations. In essence, the BIG tax requires companies to quantify unrecognized appreciation at the time an S election is made. Any C corporation that makes an S election must measure its fair market value from the date of its S election as compared to its tax basis. As a result, selling loss assets to offset built-in gains is only one way to reduce BIG tax liability.

Reporting for the amount of a company’s unrecognized built-in gains is provided on page two of Form 1120S — the S Corporation Tax Return. If a company fails to properly calculate or provide this information, it may be liable under the BIG tax. As a result, your business could end up owing taxes on any unrealized profits for up to 10 years following your change to an S corporation. Our tax and business formation lawyers can carefully review your company’s financial situation in order to ensure that you make the transition to an S corporation with limited liability under the BIG tax.

Limited Liability Companies and S Corporations

At the federal level, there is no tax return for an LLC; rather, LLCs must choose to identify themselves as a particular business entity and file the appropriate forms accordingly. If an LLC is a partnership, you’ll need to file Form 1065, the partnership income tax return. Likewise, if an LLC self-identifies as an S corporation, it will need to file Form 1120S.

Limited liability companies that choose to incorporate as an S corporation must also complete Form 2553, electing to be treated as an S corporation. Once you complete this form, the IRS will treat you as an S corporation. As the owner or operator of your Subchapter S corporation, you must place yourself on the payroll and pay and report your payroll taxes. Of course, your pay can be deducted as a business expense and any profit earned beyond necessary business expenses will not be taxed at the corporate level. As a Subchapter S corporation, profits and losses are passed along to shareholders according to Schedule K-1 and included as passive income on your 1040.

Passive income is not subject to the 15.3 percent self-employment tax, and this is only one advantage associated with electing Subchapter S corporation status as an LLC. Subchapter S income can also offset passive losses, further reducing your tax liability.

Contact Woodbury Corporate Tax Attorneys at the Stefans Law Group

There are a number of financial issues that must be taken into consideration when electing S corporation status. To schedule an appointment to discuss your case and what would work best for you, contact Woodbury corporate tax attorneys at the Stefans Law Group today.