Q: I just opened a business and formed it as a Limited Liability Company under my state’s laws. For federal tax purposes, how do I classify my LLC?
A: An LLC may be classified for federal tax purposes as a sole proprietorship, a partnership, or a corporation. If the LLC has only one owner, the LLC will automatically be treated as a sole proprietorship unless another election is made by the owner. On the other hand, if the LLC has two or more owners, it will be classified as a partnership unless an election is made. The election is made on IRS Form 8832. Unless the election is made, the classification will be the default classifications.
Q: I would like to set up a Subchapter S Corporation. How do I do this?
A: You must first file articles of incorporation with your respective state. Once this is done, IRS Form 2553 must be filled out to make the Subchapter S election.
Q: I am the owner of an S Corporation. If in any given year I do not take any money out of the company, will I have to pay taxes on the income from the business?
A: S Corporations are what is known as “flow through entities”. If an S Corporation turns a profit, that profit flows through to the owner(s) of the company. Regardless of what distributions or cash the owner takes from the company, the shareholder will see income from the profit of the company.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors