consult a tax/law pro. my understanding is that only individuals can make the 475(f) election.
and making the 475(f) election for an individual means trading income is not self-employment income
some of the questions you ask are legal issues that we can't answer.
How LLCs Are Taxed
By default, your LLC is taxed in one of two ways, depending on how many owners (called "members") are in the LLC:
- A single-member LLC is considered a disregarded entity and is taxed as a sole proprietorship, filing Schedule C to for the individual's personal tax return.
- A multiple-member LLC is taxed as a partnership. The partnership files an information return on Form 1065, with Schedule K-1's for each member/partner.
- Many states have annual fees for all LLC's and some impose an income tax on the net income
For Federal and state purposes LLC member taxes are based on their share of the income of the business for the year. No matter how much or how little LLC members take out of the business for personal use, they are taxed on the full amount of the annual net income of that business. neither single-member or multimember LLC's pay salaries to their members.
C-corporation
LLC Taxed as a Corporation
Many LLCs choose to be taxed as corporations to save on taxes. In this tax situation, the LLC members become shareholders and they are not self-employed.
For higher-income individuals or those with profitable LLCs, the fact that corporate shareholders don't have to pay tax on their share income of the corporation is a tax advantage. The corporate rate (a flat 21%, beginning with the 2018 tax year) may be lower than the higher tax rates for personal income taxes.
You also avoid having to pay self-employment tax, unless you work in the corporation as an employee (and pay FICA tax). most likely a significant portion of the net income would need to be paid out as salary because it is your personal work and expertise that is generating the profits.
C-Corp classification for tax purposes is done by filr ing form 8832. my personal opinion is that it makes no sense to form an LLC just to have it taxed as a C corporation. as a C-Corporation distributions ( dividends) are taxed to the individual so in effect there's double taxation. the remaining profit is taxed a 21% and then if the distributed tax at the taxpayer level.
S-Corp
LLC Taxed as an S Corporation
An S corporation is a special kind of corporation that has some tax advantages. Owners can split their income from the S corporation between a distribution (in the same way as a partner in a partnership) and status as an employee. An S corporation owner who works in the business must be paid a reasonable salary as an employee and must pay tax and FICA tax on this salary. Again due to the nature of the work done a substantial portion of the profits would need to be paid out as salary
Because the S corporation profits are distributed to owners, this tax status avoids the double taxation situation.
To qualify to be taxed as an S corporation, the business must meet specific requirements:
- the business can have no more than 100 shareholders
- no shareholder can be a nonresident alien (noncitizen who doesn't live in the U.S.
- there can be only one class of stock
- all shareholders must be individuals (not other businesses)5
Another advantage of S corporation status is that an S corp owner can take a 20% tax deduction from his or her share of business income, in addition to usual deductions for business expenses. This Qualified Business Income (QBI) deduction is calculated on the owner's income as an employee. This deduction is not available for personal service businesses like accounting, law, consulting, or financial services. Also, the QBI deduction is limited or not available for higher-income business owners.
Many LLC's choose the S corporation for its tax status because:
- It avoids the double taxation situation of corporations
- S corporation owners can take the QBI deduction on business income (not employment income)
- Owners pay Social Security/Medicare tax only on employment income.
How to Make the Election
If you decide to make this election, here is some more information you need to know:
fOR THE LLC To be taxed as a Corporation, use IRS Form 8832 — Entity Classification Election. The election to be taxed as the new entity will be in effect on the date entered on line 8 of Form 8832. The election cannot take effect more than 75 days before the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. This election is not needed if the entity was originally formed as a Corporation.
The form includes a consent statement which may be signed by all members, or by one member on behalf of all members. If one member signs, there should be some record in company membership meetings that all members approved this election.
You must provide the name(s) and identifying the number(s) of owners (Social Security Number for a single-member LLC, and Employer ID Number for multiple member LLC).
This election is not needed if the entity was originally formed as a Corporation.
To be taxed as an S Corporation, use IRS Form 2553 - Election by a Small Business Corporation. To begin the new tax classification for a year, you must file by March 15, effective for the entire year. You will need to include information about each shareholder: name and address, shares owned, Social Security number, the date the owner's tax year ends, and a consent statement
