To get your LLC taxed as an S corporation, you need to ask the IRS to consider it a C corporation first. For that reason, they're not called a disregarded entity. Even though they only pay tax through their owners, LLCs taxed as S corporations must inform the IRS of earnings each year. S corporationsīusinesses taxed as S corporations file an information return, Form 1120-S. What does that mean? Potentially, tax savings. S corporations, another type of pass-through business, function nearly the same, but they have a key difference: Owners of S corporations who actively work in the business are considered employees, and owners of disregarded entities are not. The amount you draw from your business doesn't generally impact your tax liability because taxes are based on earnings, not the amount you take home. If taxed as a disregarded entity, your LLC pays you a "draw," not a salary or wage. Standard single-owner LLCs file no separate business tax return, so they're called a disregarded entity. Sole proprietorships are a type of pass-through business where the business pays tax on profits through your personal tax returns. By default, they're taxed like sole proprietorships. Single-owner LLCs are 100% owned by one person or, depending on the state, one married couple. The best tax treatment option maximizes your tax savings when you file your small business taxes. You may change your LLC's federal tax classification to either an S corporation or a C corporation. When you create an LLC, it's automatically taxed as a sole proprietorship or as a partnership, depending on the number of owners, called members. LLCs also offer business owners more flexibility in how they're taxed. Many business owners choose to start their businesses as limited liability companies (LLCs) because the business structure offers certain legal and financial protections.
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