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erichsend
New Member

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

I am sorry if this is 3 questions in one, but it is something that I have been confused about for a long time and have not found a clarifying answer.  I hope this question (series of questions), will help other people understand as well.

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11 Replies

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

See this IRS website for information on business entities - <a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partner...>
Carl
Level 15

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Sole Proprietorship – This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a sole proprietorship has only own owner. Depending on what state the business is in, registration is not required at the state level. But it may be required at the county, town, or other level of government below the state. For example, your county may require you to register had obtain a county issued Occupational License, which authorizes you to conduct business only within the jurisdiction of the authority that issued the Occupational License. This is most often required when the county, city or other authority below the state, taxes personal income.

Single Member LLC - This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a sole proprietorship has only own owner. This type of business is required to be registered at the state level, weather that state taxes personal income or not.  Additionally, this type of business may also be required to obtain an Occupational License for the county(s), city(s) or other more localized jurisdictions within that state, in which the business will be operating in.

Multi-Member LLC – This is a business with more than one owner.  It’s also the exact same as a Partnership (for tax purposes) This type of business also has to register at the state level, and may also be required to obtain an Occupational License from more localized jurisdictions within the state, in which that business will operate.  This type of business will file it’s own physically separate tax return with the IRS (and state if applicable) referred to as a Partnership Return, on IRS Form 1065. When completing the 1065 (using TurboTax) the business will issue each individual owner a K-1 reporting the income (or loss) of each owner. Each owner will use this K-1 to complete their personal return. So an owner can’t even start their personal return, until after the 1065 Partnership Return has been complete, filed, and all K-1’s issued to all owners.

LLC “Like an S-Corp” – For tax purposes only (and I reiterate: FOR TAX PURPOSES ONLY!!!!!) one can elect to have the IRS  treat their LLC “like an S-Corp” ****FOR TAX PURPOSES ONLY!!!!!****  This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 8332 – Entity Classification Election. This allows you to act as if your single member LLC or multi-member LLC is an S-Corp. But understand that if you want the IRS to treat your LLC like an S-Corp, then the business “must” act like an S-Corp, and follow all the laws, rules and regulations required of an S-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corporation. The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike an LLC which is considered a disregarded entity for tax purposes, and LLC that has filed form 8332 – Entity Classification Election  “is” considered and treated like a separately taxable entity.

S-Corp – This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to an S-Corp. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corp.  The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike an LLC which is considered a disregarded entity for tax purposes, an S-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

C-Corp - This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to a C-Corp. All business income and expenses is reported on IRS Form 1120 – Income Tax Return For A C-Corp.  The C-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  A C-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

Additional Information For Rental Property Owners

Occasionally a rental property owner will be “convinced” they need to put their rental property into an LLC (be it single owner or multi-owner LLC) as a means of protecting themselves and their personal assets from legal litigation should they ever be sued by a tenant. The property owner is told the LLC gives them and their personal assets a “veil of protection” from any legal litigation that may arise as the result of legal actions perpetrated by a rental tenant. Nothing could be farther from the truth.  If you check court records (even in your local area) you’ll probably find numerous cases where a tenant sued their landlord and the LLC provided practically no protection of the property owner’s assets. That “veil of protection” supposedly offered by an LLC is so thin, even a new first time lawyer has no problem piercing that veil and attacking the personal assets of the property owner on behalf of the tenant. There are other problems and issues with this too.

In order to legally transfer ownership of rental property to an LLC, the owner must have the permission of the mortgage holder. No lender in their right mind will give this permission either. Even if you think you can refinance the property or “sell” it to your LLC, unless your LLC has the cash on hand to pay for it in full, your LLC will never qualify for the mortgage loan. The lender doesn’t want to risk your LLC going under (by filing bankruptcy for example), and they lose money because of it. So I’m confident in telling you, that’s not going to happen.

When you create an LLC for your rental property, it’s generally understood that business income gets reported on SCH C as a part of your personal tax return. However, a SCH C business produces “earned” income, and a rental property produces “passive” income. What’s the difference?

Earned income is income which you have to do out and “do something” in order to earn it. This income is subject to regular income tax, and also an additional 12.6% self-employment tax. The SE tax is basically the employer side of your social security and Medicare. But rental income is not “earned” income, and therefore is not reported on SCH C. So if you create an LLC for your rental property, then absolutely nothing concerning that rental property will be reported  on SCH C. Not one penny of rental income, and not one penny of rental expenses.

Rental income is “passive”. That’s because all you do with rental property on a recurring basis is just “sit there” and collect the rent every month. You are not “doing anything” to “earn” it on a recurring basis. That’s why rental income is reported on SCH E. Rental income is subject to regular tax, but is NOT subject to the additional self-employment tax. This means that rental income DOES NOT COUNT for your social security account or Medicare contributions.

SO if you create an LLC for your rental property, there are two things that will NOT happen.
 
- You will not be able to “legally” transfer ownership of the property from you, to the LLC.
 - You will not report one penny of rental income or one penny of rental expense on SCH C.

So in the end, you will be filing a zero income/expense SCH C with your personal tax return.

Now let’s say you decide to file the 8832 to treat your LLC like an S-Corp, and then you transfer ownership of the property to your LLC. You can and will report your rental income on SCH E as a part of the 1120-S Corporate Return, and you will also report the K-1 on SCH E as a part of your personal tax return. But keep in mind that this is for ***TAX PURPOSES ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will recognize your S-Corp, and I seriously doubt the court will recognize the S-Corp as a physically separate owner of the property. Remember, that 8832 Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at all for any and all other legal purposes – such as you being sued by a tenant.

SO if you want to do this (and it still makes no financial sense) then form an actual S-Corp and transfer ownership of the property to the S-Corp. More than likely the lender won’t allow the transfer. But you can sell the property to the S-Corp if the S-Corp can qualify for a mortgage loan.  Overall though, It’s still financially dumb to do this. Here’s why I say that.

When you move out of your primary residence and convert it to residential rental real estate, you have to convert your homeowner’s insurance policy to a rental dwelling policy. Or if you buy the real estate as rental property outright, then you have to obtain a rental dwelling policy at that time.  A rental dwelling policy will, at a minimum, include $300,000 of liability coverage. For most that will suffice. But if the property is in certain areas of the country you may want more liability coverage. I have three rentals myself and have a total of $1,000,000 of liability on each. It cost me less than an additional $100 a year on the insurance for each property. So for me, it’s worth it. It’s also significantly cheaper not only in money, but in time spent dealing with corporate taxes and all that other additional paperwork crap.

One mistake I see quite often is that when an owner converts their primary residence or 2nd home to rental property, and they fail to update their insurance policy. This can bite when you have a claim. If the property is issured as your primary residence, but you are using it as rental property (which is other than it’s insured use) don’t be surprised when the insurance company denies your claim, and you can’t find any lawyers that will take your case.  If it’s a case of you being sued by a tenant, then to be honest and put it bluntly, you’re screwed.


erichsend
New Member

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Thank you Carl.  I did not understand that an S-Corp is something that is registered separately and that the 2553 only elects for an LLC to be taxed "LIKE" an S-Corp.  Thank you for highlighting the "Like" part for me.  Really cleared things up! Have a nice day!
Carl
Level 15

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

I'm not a business guru by any stretch of the imagination. But I've been self-employed as a single member LLC for just over 13 years now. I have never been able to comprehend why on earth someone would want their LLC "treated like an S-Corp", since that election is for tax purposes only, and nothing else. Seems to be that since you have to "act" like an S-Corp to be treated like one, why not just set up the business "as" an S-Corp from the start, and be done with it?
But then, I do know laws for LLC's, S-Corps and C-Corps do differ from state to state, and I'm only familiar with the laws of my state of FL. It very will could be that based on laws of other states, the "treat me like an S_Corp" election may make perfect sense. But I certainly can't make sense of it, don't want to, don't need to, and really don't care to.
erichsend
New Member

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Carl, I also live in Florida.  I work full time and run a freelancing web development business part-time (one man operation). I registered as an LLC and elected to be taxed as an S-Corp from the advice of an accountant because through the self-given distribution, I could legally avoid paying some taxes.  Is this not the case that you have found?  I would be happy to set up my business as an S-Corp if it made sense, just didn't know until now that that was an option.  Does it cost the same amount/require the same stuff as an LLC through Sunbiz does?

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Although you may not need to pay Self Employment tax on the the 'distributions', corporations can be expensive. You are required to be on payroll, which means (1) quarterly employer forms, (2) Federal Unemployment, (3) W-2/W-3, (4) State Unemployment, and (5) perhaps other State requirements (such as Worker's Compensation, disability, etc.). As a one-man operation who seems to be providing "services", MOST of your profit should be wages, rather than Distributions.
erichsend
New Member

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

TaxGuyBill-- Am I required to pay 1-5 if I am a one man LLC electing as an S-Corp vs an actual S-Corp?  Assuming the answer is yes, how does the difference between what I pay wages vs distrubtion affect those amounts?  Thanks for the help!

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Yes, all of that is still required.  Those items are required for employees (wages) and you are an employee of the LLC/corporation.

As I just stated in your other question, I *HIGHLY* recommend going to a tax professional to learn the requirements of a corporation (or LLC taxes as a corporation) and how things work.  It can be extremely expensive to NOT go to a tax professional.
Carl
Level 15

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Sounds to me like you got advice from a tax pro who's primary purpose is to make money, and serving the needs of their client in the best interest of their client, comes second. I'm the tech industry also as a single member LLC with a computer consulting business. I have no need for the additional protections of an S-Corp, as my registration as an LLC does me just fine. The chances of me being sued are so small to non-existent, it's just not worth the cost, time and paperwork required for an S-Corp. Additionally, at $600/year for my business liability insurance, it's significantly cheaper than dealing with S-Corp costs which can be quite expensive in this state. With my current LLC setup, the only "time" involved, is however long it takes me to write the check to the insurance company each year.
Now for rental property, if you have rental property and are looking to put it into your LLC, that *WILL* be expensive to do. Remember, since your LLC is treated "like an S-Corp" it has to "act" like an S-Corp. That means that in order for your LLC/S-Corp to own the rentals, either the mortgager has to agree to the transfer of the mortgage from you to the LLC (and I can tell you right now, the lender will never agree to this), or you will have to literally sell your rentals to the LLC/S-Corp. Good luck getting your LLC/S-Corp to qualify for a loan from a "descent" lender in this state. If you do, the interest rate will be high.
Finally, when completing the 1120-S for the S-Corp, the rental income is still passive and still gets reported on SCH E as a part of the 1120-S.
But instead of doing all that crap, why not look at your rental dwelling policy to confirm the amount of liability insurance? In this state, I guarantee you that it's $300,000 at an absolute minimum. If that doesn't give you the level of "protection" and comfort desired, then you can increase that liability coverage to $1M for less than an additional $100 a year. I use Heritage Insurance for my rentals, here in FL. Also, for rental or business insurance of any kind, stay away from the big names, like State Farm, Farmers, AllState, etc. They're absolute price gougers in this state. THey also try to "scare" you into staying with them by flashing the BEST ratings in your face, and talking about things like capital on hand. If they start talking that stuff to you, then it's time to get up and walk out of the agent's office. Just don't buy into all that crap.
Overall though, as TaxGuyBill says, you should seek the advice of a CPA or Tax Attorney in your local area. But don't deal with just one. Go see several TA's and CPA's, leading each to believe they're the first one you are talking to, ask them the same questions and compare notes.
ALso, after talking with professionals on this, you can confirm the information they provide you by starting at the sunbiz site at <a rel="nofollow" target="_blank" href="http://www.sunbiz.org">http://www.sunbiz.org</a>. From there, I am able to find any law, rule, regulation and statute that may apply to my business or my rentals. I can still remember when I was first researching this before starting my SCH C business. Either 4 of the 5 CPAs I talked with outright lied to my face, or they honestly didn't have a clue about the laws in this state.
The most important four words you will ever say to a tax attorney or CPA are, "SHOW ME IN WRITING."
Rlc54326
New Member

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

I own several rental properties (no mortgages) and recently changed from an LLC (reporting on Form 1040) to an S-Corp. Do I have to actually transfer" the properties from one entity to the other, and how do I do that? I have owned the properties for several years, but when I enter 1/1/202 as my S-corp election date, the program will not let me enter earlier dates of when I bought the properties....what should I do? 

What is the difference between LLC and an S-Corp? Can an LLC be an S-Corp or can an S-Corp be an LLC? And how can an LLC be taxed as an S-Corp?

Yes ... the properties must be legally transferred to the corporations which as Carl has often said it not needed to incorporate if you just want protection  ... just make sure you get a sufficient umbrella  insurance plan to cover your liability.

 

Once the assets are transferred over the depreciation starts over again using the donor's adjusted basis.  Please seek local professional assistance the first year of incorporation so you get started correctly.  If you don't have the S-Corp on extension the return is now late and you are accruing penalties monthly.  

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