Form Your LLC and Elect S-Corporation Tax Status
An LLC taxed as an S-Corporation combines the liability protection and operational flexibility of a limited liability company with the potential tax advantages of S-Corporation treatment.
Linnemeyer Law advises clients on the formation, structuring, and governance of Illinois LLCs, including operating agreements and S-Corporation elections.
Flat Fee LLC Formation with S-Corporation Election
$650 + State Filing Fees and Costs
Includes:
-Articles of Organization
-EIN (Employment Identification Number)
-IRS Form 2553 (S-Corporation Election)
-Operating Agreement
-Registered Agent Service (5 years)
What is an LLC Taxed as an S-Corporation?
An LLC is a legal entity formed under state law. An S-Corporation is a tax classification recognized by the Internal Revenue Service. An Illinois LLC may elect S-Corporation tax treatment while continuing to operate as an LLC under Illinois law. This structure allows business owners to retain the flexibility and liability protection of an LLC while taking advantage of the tax treatment afforded to S-Corporations. The election affects only the company’s tax classification and does not alter its legal structure under Illinois law.
Why Do Business Owners Elect S-Corporation Tax Status?
There are many reasons why choosing to be taxed as an S-Corporation could be beneficial.
Potential Self-Employment Tax Savings
For many owner-operated businesses, S-Corporation tax treatment may reduce self-employment tax exposure. In particular, owners may be able to reduce self-employment tax exposure by receiving reasonable compensation as wages while taking additional earnings through distributions, subject to applicable tax laws and IRS requirements. Unlike wages, S-Corporation distributions generally are not subject to self-employment taxes or FICA payroll taxes, although they remain subject to federal and state income taxes.
Pass-Through Tax Treatment
Like most LLCs, S-Corporations generally avoid federal income tax at the entity level. Profits and losses pass through the owners.
Liability Protection
The election of S-Corporation tax treatment does not alter the LLC’s status as a legal entity under Illinois law. The company continues to operate as an LLC and retains the liability protection afforded to its members under applicable law.
Businesses That Commonly Consider S-Corporation Elections
S-Corporation tax treatment is often most beneficial for owner-operated businesses that generate profits in excess of the compensation reasonably paid to the owner for services rendered, including:
- Consultants
- Marketing agencies
- Software developers
- Healthcare practices
- Therapists and counselors
- Real estate professionals
- Engineers
- Architects
- Independent contractors
- Professional service firms
Many business owners consider an S-Corporation election once the anticipated tax savings are sufficient to offset the additional payroll, tax filing, accounting, and administrative obligations associated with S-Corporation treatment.
Frequently Asked Questions
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Can a single-member LLC elect S-Corporation taxation?
Yes. A single-member LLC may elect to be taxed as an S-Corporation if it satisfies applicable IRS requirements. Many owner-operated businesses utilize this structure because it allows them to maintain the simplicity and liability protection of an LLC while potentially benefiting from the tax treatment available to S-Corporations. In fact, many S-Corporation elections are made by single-member LLCs whose owners actively participate in the business.
Do I need payroll after making an S-Corporation election?
Generally, yes. Owners who provide services to the business are typically required to receive reasonable compensation through payroll before additional earnings are distributed. The determination of reasonable compensation depends on the specific facts and circumstances of the business, and business owners should consult their accountant or tax advisor regarding these requirements.
What are the requirements for maintaining S-Corporation tax status?
To maintain S-Corporation tax status, a business must continue to satisfy the eligibility requirements established under the Internal Revenue Code. An S-Corporation may not have more than 100 shareholders, and shareholders are limited to individuals who are U.S. citizens or residents, certain qualifying trusts, and estates. Partnerships, corporations, and nonresident aliens are not eligible shareholders.
In addition, an S-Corporation may have only one class of stock for tax purposes, meaning that ownership interests must provide identical economic rights with respect to distributions and liquidation proceeds. While voting rights may vary among owners, arrangements that create disproportionate economic rights can jeopardize S-Corporation status.
When should I make the election?
To have the election take effect for a particular tax year, IRS Form 2553 generally must be filed no later than two months and fifteen days after the beginning of the tax year for which the election is intended to be effective. For a newly formed LLC, this typically means filing within two months and fifteen days of the entity’s formation date if S-Corporation tax treatment is desired for the company’s first tax year.
Does an LLC taxed as an S-Corporation need an Operating Agreement?
Yes. Every LLC taxed as an S-Corporation should maintain a carefully drafted operating agreement. An operating agreement serves as the principal governing document of the company and establishes the ownership, management, and economic rights of its members.
For an LLC that has elected S-Corporation tax treatment, the operating agreement is particularly important because it should contain provisions designed to preserve the company’s S-Corporation status. These provisions may include restrictions on transfers to ineligible owners, limitations intended to prevent the creation of multiple classes of equity, and other protections designed to maintain compliance with the requirements for S-Corporation taxation.
Linnemeyer Law prepares customized operating agreements for Illinois LLCs taxed as S-Corporations on a flat-fee basis. Our operating agreements are drafted with the company’s ownership, governance, and tax objectives in mind and include provisions intended to support the preservation of the LLC’s S-Corporation tax status as the business grows and evolves.
Does an S-Corporation election change my LLC into a corporation?
No. An S-Corporation election affects only the company’s tax classification and does not change its legal structure. The entity remains an LLC under Illinois law and continues to provide the liability protection and operational flexibility associated with the LLC structure.
Can existing LLCs elect S-Corporation taxation?
Yes. An existing LLC may elect S-Corporation tax treatment without changing its legal status as an LLC under Illinois law. To be effective for a particular tax year, the election must typically be filed no later than March 15 of that tax year (or, for a newly formed entity, within two months and fifteen days after formation).
Why work with Linnemeyer Law?
Linnemeyer Law provides practical legal counsel for business owners throughout Illinois.
We regularly assist clients with:
- LLC formation
- Operating agreements
- Business transactions
- Startup formation
- Commercial real estate matters
- Ongoing outside general counsel services
Unlike many online formation services, Linnemeyer Law prepares attorney-drafted operating agreements that are tailored to LLCs taxed as S-Corporations. These operating agreements are designed to address ownership, governance, and tax-related considerations unique to LLCs that have elected S-Corporation tax treatment.
Our goal is simple: help business owners establish the right legal structure from the beginning and avoid costly issues later.
Schedule a Consultation
Thinking about forming an Illinois LLC or electing S-Corporation tax status?
Contact Linnemeyer Law today to discuss your business goals and determine the right structure for your company.
Serving clients throughout Illinois, including DuPage, Cook, Will, Kane, and Kendal Counties.