Subchapter S Election for a Single-Member LLC

Should a single-member LLC choose a Subchapter S election? This article describes a key reason why single-member LLCs should make a Subchapter S election.

Tax Classification of LLCs

Newly formed limited liability companies which have only one member are classified by the IRS for tax purposes as a “sole proprietorship” by default. This classification means that revenues and expenses generated by the LLC will be reported on the member’s own personal tax return under Schedule C.

The LLC may choose to be classified for tax purposes as a corporation under Subchapter S of the Internal Revenue Code. Subchapter S corporations are frequently called “S corporations.” Revenues and expenses for S corporations are reported on Schedule K-1. The information in Schedule K-1 is then included in the member’s personal tax return.

Reason to Make a Subchapter S Election

A key reason to make a Subchapter S election is to avoid self-employment tax. Currently, employment taxes of 13.3% are levied against the first $106,800 of income made by a sole proprietor. However, for corporations (including S corporations), only salaries are subject to such taxes. Profits are not.

As an example, if a sole proprietorship generates $100,000 in income, $13,300 would have to be paid as self-employment taxes. However, if an S corporation generates $100,000 in revenue, and pays $50,000 in salaries, leaving $50,000 in profit, then only $6,650 would have to paid in employment taxes by the employer and employee (13.3% of $50,000); employment taxes are not paid on profit. This saves $6,650 per year.

Please note that salaries paid by corporations have to be reasonable and members of S corporations should plan for quarterly tax withholdings.

How Do You Make a Subchapter S Election?

The LLC must first elect to be classified as a corporation. Following the corporation classification, the member of the LLC then files a document making a Subchapter S election.  There are some restrictions on S Corporations, as described in this article on the IRS website, although they are infrequently relevant to single-member LLCs.

Please contact Fennemore for more information or assistance in making a Subchapter S election for your single-member LLC.

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