What is needed to turn my LLC into an S corporation?
An LLC is a separate legal entity that can conduct business just like a corporation with many of the advantages of a partnership.; It is taxed as a partnership. ;Its owners are called members and receive income from the LLC just as a partner would.; There is no tax on the LLC entity itself. The members are not personally liable for the debts and obligations of the entity like partners would be.; Basically, an LLC combines the tax advantages of a partnership with the limited liability feature of a corporation.
A Subchapter S corporation is a corporation in which the shareholders elect to be treated as partners for income tax purposes. Shareholders still have limited liability protection of a corporation, but income is treated like partnership income. Subchapter S refers to a particular subdivision of the Internal Revenue Code. The number of shareholders is limited to 100 shareholders and neither corporations nor partnerships can be shareholders in a Subchapter S corporation. Also, shareholders must be citizens or resident aliens.
Since an LLC classifies your business as a legal entity separate from a member's personal assets. An S-Corporation appears to offer no more protection to personal assets of its members than an S-Corporation to its shareholders.
Both S Corporations and LLCs allow owners to avoid "double taxation" and to pay income taxes on a flow-through basis like sole proprietors and partners. Here are some key examples of the benefits of an LLC verses an S Corporation.
1. An LLC is simpler and faster to form. It may be formed in one step, while an S Corporation election can only be made after a General Corporation is formed first.
2. An LLC is not required to hold annual meetings or to keep formal minutes, while an S Corporation is required to do so.
3. LLC members can split profits/losses in any way they choose. In an S Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business.
4. An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation .Other entities generally may not own an S Corporation.
However S Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits. In particular, LLCs that provide professional services such as health, law or engineering should consult a tax advisor on this issue.
If you decide to go forward with an S-Corporation, please see the following form packages:
MT-00INC; Montana Business Incorporation Package to Incorporate Corporation
MT-00INCFCorporations - Records Maintenance - Packages - Montana