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​ELECTING S CORP STATUS FOR LLC

INCOME TAX PREPARATION

In some situations, business owners have state-law reasons for wanting their business to be formed as a limited liability company (LLC), but for tax purposes they would prefer S corporation (rather than partnership) tax treatment. For example, S corporation status may be desired because a partner in a partnership is subject to self-employment tax on his or her distributive share of the partnership’s trade or business income, while an S corporation owner is not subject to self-employment tax on his or her passthrough income or distributions from the S corporation.

Electing S Status for a Corporate Entity Under the Check-the-Box Rules

An LLC can elect under the check-the-box rules to be classified as a corporation. If the LLC makes the election it is deemed to (1) transfer all of its assets and liabilities to the corporation in exchange for the corporation’s stock and then (2) distribute the stock to its owners in complete liquidation (Regs. Sec. 301.7701-3(g)(1)). The deemed transfer to the corporation is tax free, assuming Sec. 351(a) applies and the LLC’s liabilities do not exceed the basis of its assets. The LLC can then elect S status, assuming that its members are eligible to hold S corporation stock (Regs. Secs. 1.1361-1(c) and 301.7701-3).

The entity normally files the election to be taxed as a corporation on Form 8832, Entity Classification Election , in accordance with Regs. Sec. 301.7701-3(c). However, if an LLC that is eligible to elect S status timely files an S election (Form 2553), the entity is considered to have elected to be taxed as a corporation (Regs. Sec. 301.7701-3(c)(1)(v)(C)). This means that the entity does not have to file the Form 8832 if it timely and properly elects S status.

Under Regs. Sec. 301.7701-3(c), the effective date of the classification election specified on Form 8832 cannot be more than 75 days before the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. This means that the classification change can be retroactive for up to 75 days before the entity files Form 8832. Under S corporation rules, however, a newly formed corporation must file the S election on or before the 15th day of the third month following the corporation’s activation date, which is the earliest date that the corporation has shareholders, acquires assets, or begins conducting business.

If the entity plans to elect to be treated as a corporation and become an S corporation on the same date, only Form 2553 is filed, and it should conform to S corporation rules. The authors recommend that the entity file the Form 2553 by the earlier of 75 days or two months and 15 days after the date the S election is to become effective. In this way, the entity will have filed Form 2553 within both the Form 8832 and Form 2553 filing limits.

Planning tip: An LLC that elects to be treated as a corporation and become an S corporation on the same date is not required to do so on the first day of the calendar year. Rather, the election can be retroactive or prospective within the time limits surrounding the date the LLC files Form 2553, as outlined above. Allowing an LLC to make a midyear S election makes sense because a newly electing S corporation can begin its first S year at any allowable date. To conform to S corporation rules, however, the authors recommend that the effective date of the S election should not occur before the earliest date that the LLC has members, acquires assets, or begins conducting business.