LLC w/ S-Corp Election vs. Plain S-Corp

[Lauren Norwood]

Hello,

What is the difference between the two or are they treated the same by the IRS? I keep getting different answers and I just wondering if someone could clarify.

Thanks,

Lauren :lol:

[Joe Wilson]

BY DEFAULT, an LLC is taxed as a partnership, no an S-corp. These entities are very different and have completely different tax issues in regards to their tax treatment and federal & state legal entity status. You can use the 'check the box' rules and choose the LLC to be taxed as a corporation and then file a 2553 to elect S-status. The main reason to do that would be for state legal entity issues and liability protection that an LLC would give you that a corp would not. I can't think of any examples, but that is one of the only things I can think of for having it set up that way instead of forming a corp and then electing S-status. You still have the qualifying shareholder issues even if you are an LLC and choose corp taxation and elect S-status. The main difference to look for in these two entities is that the LLC has SE tax on ordinary income, so you do not want to have a management company being an LLC. You want your LLC to be your property owner for Rental Real Estate income because you will have basis in the LLC and be able to deduct losses on your tax return and still have positive cash flow from non-taxable distributions. You want your S-corp. to be your management company because you don't want your losses from the ownership of the property to be suspended in the Corporation, but the income from the management fees are ordinary income and are not subject to SE tax. Setting up two companies for each of these duties will save you OVER 15% in taxes.
Joe