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Is an S Election for an LLC Smart Planning or a Bad Idea?

08/18/2016

By default, a limited liability company (“LLC”) with two or more members is taxed as a partnership. It also is possible to elect to treat an LLC as an S corporation for income tax purposes. But is it a good idea? And if an S election is made, what could go wrong? As we explain below, an S election for an LLC is rarely a good idea, in part because of the many things that can go wrong. Instead, the preferred entity for use when making an S election is a state law corporation.

An entity treated as a corporation for income tax purposes (a “C corporation”) is subject to tax on earnings at both the corporate level and shareholder level. One exception to this double tax is when a corporation elects to be an S corporation. In that case, corporate income in general passes through the S corporation tax-free and is taxed only once at the shareholder level. The single level tax of an S corporation is typically more tax efficient than a C corporation.

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