Are there advantages to owning an LLC through an S Corporation?

Are there advantages to owning an LLC through an S Corporation?

Although they can be advantageous for tax purposes, S Corporations come with certain restrictions.

Shareholders may only be individuals, certain trusts, estates, and certain exempt organizations. Businesses or other corporations may not be an owner in an S Corp. S Corporations are limited to 100 shareholders who must also be US citizens or residents. The biggest caveat for S Corporations is the allocation of profits and losses. Because S Corporations are permitted to only have one class of stock, all profits, losses, and distributions must be allocated in proportion to each owner’s interest in the business.

In contrast, anyone or any entity can be a partner or member in an LLC. An LLC can also distribute the profits of the company in whatever way the members agree to.

In what situations might it be advantageous to have an S Corporation be an owner in the LLC?

  • The partners in an LLC may have a separate agreement stating how to distribute the profits that differs from the respective percentage ownership. However, a partner may want to save on self-employment taxes, so creates an S Corporation to own the shares of the LLC. The partner must still take a reasonable salary from the S Corporation as a shareholder/employee. The LLC income passes to the S Corporation, which is reported on the shareholder’s 1040 tax return.
  • A person may be a partner in multiple LLCs, so they set up an S Corporation to own the shares in each LLC. The S Corporation will report all the income from the 1065 K-1’s, as well as pay the salary of the shareholder. Only the S Corporation will be reported on the shareholder’s 1040 tax return.
  • A business may have more than one stream of revenue. Creating separate LLCs for each line of revenue and owning them through an S Corporation can separate and limit the liability for each revenue stream.
  • Two people already are S Corporation owners but decide they would like to go into business together. A solution could be to create an LLC and own it through their respective S Corporations, since an S Corporation cannot own another S Corporation.

Of course, this is not an exhaustive list of possible situations. Please consult your tax professional to decide if this is the right entity structure for you.

Should I Elect S Corporation Status for my LLC?