LLC or S-Corp?
April 8, 2025in Corporate Law, LLCs, Corporations, and Partnerships

Can an LLC be an S-Corp?

You’ve got questions and we’ve got answers! We know some terminology can be confusing. We’re here to clear the air and give you a complete understanding of what it means to be both an LLC and and S-Corporation.

Q: Can a limited liability company (LLC) elect to be taxed as an S-Corporation?
A: Yes, an LLC can choose to be taxed as an S-Corporation by filing the appropriate forms with the Internal Revenue Service (IRS). This election does not change the entity’s legal structure under state law—it remains an LLC—but it does alter how the business is treated for federal income tax purposes.

Q: What is the benefit of electing S-Corp taxation for an LLC?
A: The primary benefit is the potential reduction in self-employment taxes. In a standard LLC, all business income is typically subject to self-employment tax. However, with S-Corp taxation, the owner can receive a portion of the income as a salary (which is subject to employment taxes) and the rest as a distribution (which is not), potentially lowering overall tax liability.

Q: Does electing S-Corp status make the LLC a corporation?
A: No, electing to be taxed as an S-Corp does not convert the LLC into a corporation. It is still legally an LLC and governed by state LLC statutes. The S-Corp election affects only how the entity is taxed at the federal level.

Q: How does an LLC make the election to be taxed as an S-Corp?
A: The LLC must file Form 2553 with the IRS, which is the election by a small business corporation. The form must be signed by all shareholders (or members, in the case of an LLC) and submitted within the required time frame, usually within 75 days of the beginning of the tax year for which the election is to take effect.

Q: What are the requirements to qualify for S-Corp taxation?
A: The LLC must meet several eligibility criteria: it must be a domestic entity, have no more than 100 shareholders, have only allowable shareholders (which generally means U.S. individuals, certain trusts, and estates), and it must have only one class of stock. These rules are strictly enforced, and non-compliance can result in the loss of S-Corp status.

Q: Can a multi-member LLC elect S-Corp taxation?
A: Yes, a multi-member LLC can make the election to be taxed as an S-Corp as long as all members are eligible shareholders. The LLC must also comply with the one-class-of-stock requirement, which means profit and loss distributions must be proportionate to ownership interests.

Q: Can a single-member LLC elect to be taxed as an S-Corp?
A: Absolutely. A single-member LLC can elect S-Corp status provided the sole member is an eligible shareholder. The key consideration is whether the tax benefits outweigh the increased administrative obligations.

Q: What are the tax implications of this election?
A: An LLC taxed as an S-Corp is treated as a pass-through entity, meaning that the income is reported on the owners’ individual tax returns, not at the corporate level. However, unlike a standard LLC, the owner must be paid a reasonable salary, and payroll taxes must be withheld and paid. The remaining profits can be distributed without being subject to self-employment tax.

Q: What constitutes a “reasonable salary”?
A: The IRS requires that owners who work in the business receive a salary that reflects the market rate for the services they perform. This is a highly scrutinized area, and underpaying oneself can result in penalties and the reclassification of distributions as wages.

Q: Does electing S-Corp taxation add complexity?
A: Yes, it does introduce additional requirements. The LLC must run payroll, file quarterly payroll tax returns, issue W-2s to owner-employees, and potentially maintain corporate-like formalities to support the election. This added complexity often requires help from a CPA or payroll provider.

Q: Can the S-Corp election be revoked?
A: Yes, an LLC can revoke its S-Corp election by filing a revocation statement with the IRS. This can be done voluntarily if the owners decide the structure is no longer beneficial, or involuntarily if the LLC fails to meet the ongoing requirements.

Q: Are there restrictions on how profits can be allocated in an LLC taxed as an S-Corp?
A: Yes. Because the IRS views an S-Corp as having only one class of stock, profit distributions must be made in proportion to ownership interests. Unlike in a traditional LLC where members can agree to special allocations, that flexibility is limited under S-Corp rules.

Q: How does this affect the LLC’s operating agreement?
A: It’s important to review and potentially revise the operating agreement to ensure it aligns with the S-Corp election. Provisions related to distributions, compensation, and member roles should be carefully drafted to comply with IRS guidelines and avoid inadvertent termination of the S-Corp status.

Q: Do state tax laws align with federal S-Corp treatment?
A: Not always. State tax treatment of LLCs and S-Corps varies. Some states recognize the S-Corp election and tax accordingly, while others do not. Additionally, some states impose separate franchise or gross receipts taxes. It’s important to evaluate the impact at both the federal and state levels.

Q: Should every profitable LLC elect to be taxed as an S-Corp?
A: No. While S-Corp taxation can offer significant savings for some businesses, especially those with consistent profits and active owners, it’s not the best fit for everyone. Businesses with lower profits, passive owners, or those unable to manage the added complexity may not benefit. Each situation should be evaluated individually, ideally with the advice of a tax professional.

Q: Does the election affect liability protection?
A: No. The S-Corp election has no impact on the legal protections provided by the LLC structure. Members continue to enjoy limited liability protection for business debts and obligations, as long as corporate formalities are respected.

Q: What should business owners consider before making the election?
A: Before making the election, owners should consider factors such as expected net income, the owner’s role in the business, the ability to pay a reasonable salary, and the capacity to manage additional compliance obligations. They should also review their business’s long-term goals, funding plans, and operating structure.

Q: What’s the bottom line?
A: Electing to have your LLC taxed as an S-Corporation can be a strategic move to reduce self-employment taxes and retain more earnings. However, it comes with greater administrative responsibilities and stricter IRS rules. It’s not a one-size-fits-all solution and should be approached with careful planning and professional guidance

Need help deciding whether S-Corp taxation is right for your LLC?

The business attorneys at Moore Law are here to guide you through the process and ensure your structure supports your goals. Call us at (615) 747-7467, or use the chat option on our website to get started.

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How do you get an EIN?
October 28, 2024in Business Resources

How do I obtain a federal Employer Identification Number (EIN)?

If you’re starting a business or need to hire employees, one of the first steps you’ll need to take is obtaining a Federal Employer Identification Number (EIN). This number, also known as a Tax ID Number, is issued by the IRS and is used to identify your business for tax purposes. Think of it as a Social Security number for your business. Whether you’re a sole proprietor, LLC, corporation, or non-profit, an EIN is essential for managing taxes, hiring employees, and opening a business bank account.

In this guide, we’ll walk you through what an EIN is, why you need one, and how to obtain an EIN in just a few simple steps.

What Is an EIN?

A Federal Employer Identification Number (EIN) is a unique, nine-digit number assigned by the IRS to businesses operating in the United States. The EIN is used to track your business’s tax obligations and is required for many business-related activities, including filing taxes, hiring employees, and applying for business licenses.

If you’re wondering whether your business needs an EIN, here are some common reasons why you may need one:

  • Hiring Employees: If you have or plan to hire employees, you’ll need an EIN to report payroll taxes to the IRS.
  • Operating as a Corporation or Partnership: Corporations, partnerships, and certain types of LLCs are required to have an EIN.
  • Filing Business Taxes: Businesses must use an EIN to file federal taxes, and in many cases, state taxes as well.
  • Opening a Business Bank Account: Most banks require an EIN to open a business account.
  • Applying for Business Licenses: Certain federal, state, or local business licenses require an EIN.
  • Establishing Credit: If you plan to apply for business credit or loans, lenders often require an EIN.

Even if you are a sole proprietor without employees, getting an EIN can help keep your personal and business finances separate, and it’s often required by vendors or clients who need your Tax ID for payment purposes.

Step-by-Step Guide to Obtaining an EIN

Obtaining an EIN is a straightforward process, and the IRS offers several ways to apply. Here’s how to get an EIN step by step:

Step 1: Determine If You’re Eligible

Before applying for an EIN, you must ensure that you are eligible. The requirements are simple:

  • Your Business Must Be Located in the U.S.: To qualify for an EIN, your business must be physically located in the United States or a U.S. territory.
  • The Applicant Must Have a Valid Taxpayer ID Number: The person applying for the EIN (whether that’s you or an authorized representative) must have a valid Taxpayer Identification Number (TIN), which can be a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

If you meet these eligibility requirements, you’re ready to move on to the next step.

Step 2: Gather the Required Information

Before you apply for an EIN, it’s helpful to gather the necessary information to streamline the process. You’ll need:

  • The Legal Name of Your Business: The name under which your business is legally registered. If you’re a sole proprietor, this may simply be your own name. For LLCs, corporations, or partnerships, this will be the official name registered with the state.
  • Trade Name or DBA (if applicable): If your business operates under a different name than its legal name, you’ll need to provide the “Doing Business As” (DBA) name.
  • Business Structure: You’ll need to specify your business’s legal structure (e.g., sole proprietorship, partnership, LLC, corporation, non-profit). If you’re not sure which structure applies to your business, this might be a good time to consult with a business attorney or accountant.
  • Responsible Party: The IRS requires that you designate a “responsible party” for the business—this is typically the owner or principal officer who controls the business. The responsible party must provide their name and Social Security number (SSN).
  • Reason for Applying: You’ll be asked to provide the reason you’re applying for an EIN, such as starting a new business, hiring employees, or changing the organization of your business.

Step 3: Choose Your Method of Application

You can apply for an EIN in several ways: online, by fax, by mail, or by phone (for international applicants). Each method has its advantages depending on your timeline and preferences.

Apply Online (Fastest Option)

The quickest and easiest way to get an EIN is by applying online through the IRS website. The online application process is available to all business entities whose principal business, office, or agency is located in the United States or U.S. territories.

  • How It Works: You’ll complete a short questionnaire and submit your application through the IRS website. The application must be completed in one session, so be sure you have all the required information ready.
  • Processing Time: You’ll receive your EIN immediately upon completing the application, and you can start using it right away.
  • Availability: The online EIN application is available Monday through Friday, from 7 a.m. to 10 p.m. Eastern Time.

Apply by Fax

If you prefer not to apply online, you can submit a paper application by fax.

  • How It Works: Fill out Form SS-4 (Application for Employer Identification Number) and fax it to the IRS. You’ll need to include your fax number so they can send your EIN confirmation back to you.
  • Processing Time: If you apply by fax, you should receive your EIN within four business days.

Apply by Mail

Another option is to apply by mail. This method takes the longest but is still a valid option if you prefer paper forms.

  • How It Works: Complete Form SS-4 and mail it to the IRS at the appropriate address (listed on the form). Be sure to include your return address so the IRS can mail you your EIN.
  • Processing Time: The processing time for mailed EIN applications is typically four to five weeks.

Apply by Phone (International Applicants)

If you are located outside the U.S., you can apply for an EIN by phone.

  • How It Works: Call the IRS at 267-941-1099 (not a toll-free number) to apply. You’ll need to have Form SS-4 completed and provide the required information over the phone.
  • Processing Time: You will receive your EIN immediately during the phone call.

Step 4: Receive and Store Your EIN

Once you’ve completed the application process, the IRS will issue your EIN, and you can start using it for business activities. If you applied online, you’ll receive the number immediately. For fax or mail applications, you’ll need to wait for the IRS to send the EIN to you.

It’s important to store your EIN in a safe place. You’ll need it for filing taxes, applying for licenses, opening bank accounts, and managing payroll, among other things.

Step 5: Use Your EIN

Once you have your EIN, you can begin using it for the following purposes:

  • Filing Taxes: You’ll use your EIN when filing business tax returns, such as income, payroll, and sales taxes.
  • Hiring Employees: You’ll need an EIN to report payroll taxes and withholdings to the IRS when you hire employees.
  • Opening Business Bank Accounts: Most banks require an EIN to open a business checking account or apply for business credit cards.
  • Applying for Business Licenses: Many federal, state, and local licenses require you to have an EIN to operate legally.

When You Don’t Need an EIN

Not all businesses are required to have an EIN. If you’re a sole proprietor without employees and don’t plan on incorporating your business, you may not need one. In that case, you can use your Social Security number for tax purposes. However, getting an EIN is still recommended for separating personal and business finances.

Final Thoughts

Obtaining an EIN is a crucial step in starting and running a business, and the process is relatively simple. Whether you’re hiring employees, filing taxes, or opening a business bank account, having an EIN ensures that your business is properly registered with the IRS and compliant with federal regulations.

The fastest way to get your EIN is through the IRS’s online application, but you can also apply by fax, mail, or phone if needed. Be sure to keep your EIN safe and accessible, as it will be required for various business operations throughout the life of your company.

We can handle all your startup needs. Reach out today and ask about our new business packages!

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nashville LLC formation lawyers
October 3, 2024in Business Resources, LLCs, Corporations, and Partnerships

What Is a Sales Tax Permit, and Do I Need One?

If you’re thinking about starting a business that sells goods or services, you’ve probably come across the term “sales tax permit.” But what exactly is a sales tax permit, and do you really need one? In this blog post, we’ll break down what a sales tax permit is, how it works, and whether your business needs one. By the end, you’ll have a better understanding of this important business requirement and how to stay on the right side of the law when it comes to sales taxes.

What Is a Sales Tax Permit?

A sales tax permit, also known as a reseller’s permit, sales tax license, or sales and use tax permit, is a government-issued license that allows a business to collect sales tax on taxable goods and services. Sales tax is a tax on the sale of goods and services that is usually passed on to the end customer. As a business owner, it’s your responsibility to collect this tax on behalf of your state or local government and remit it to the tax authority.

In other words, when you sell something to a customer, you charge them sales tax based on the rate set by your state or locality. You then report and pay that tax to the government. But in order to do that legally, you need to have a sales tax permit in place.

When Do You Need a Sales Tax Permit?

Whether or not you need a sales tax permit depends on the type of business you run and the location of your operations. Below are some common situations when a business would need to apply for one:

1. Selling Physical Goods

If your business sells physical goods like clothing, electronics, furniture, or other tangible items, you’ll almost certainly need a sales tax permit. Most states require businesses that sell goods to collect sales tax on those products.

For example, if you open a retail shop selling candles, you would need to get a sales tax permit to collect and remit sales tax on those candle sales. The same rule applies if you’re selling goods online through platforms like Etsy, Amazon, or your own website. Even though you’re selling online, many states still require you to collect sales tax based on the location of your customers.

2. Providing Taxable Services

In addition to physical goods, some states also tax certain services. If your business offers services that are subject to sales tax, you’ll need a permit to collect and report that tax. The types of services that are taxable vary from state to state.

For example, in some states, services like haircuts, car repairs, and home cleaning may be taxable, while other states might only tax goods, not services. It’s important to check with your state’s Department of Revenue to find out if the services you offer are subject to sales tax.

3. Selling Wholesale or to Resellers

If you’re selling goods wholesale (i.e., selling to other businesses that will resell the items to consumers), you may still need a sales tax permit, even though the final customer will be responsible for paying sales tax. In these cases, the business purchasing from you will typically provide you with a resale certificate, which allows you to sell them goods tax-free because they will collect the sales tax from the end customer.

4. Operating an Online Business

Many online businesses believe that they don’t need to worry about sales tax, but that’s not always the case. Depending on your state’s laws, you may need to collect sales tax if you have a “sales tax nexus.” A sales tax nexus is a legal term that refers to a significant presence in a state, such as having an office, warehouse, or even just a large number of customers.

For example, if you’re based in Texas but sell a lot of products to customers in California, you may need to get a sales tax permit for California and charge those customers sales tax. This is especially important after the 2018 Supreme Court case South Dakota v. Wayfair, Inc., which gave states more power to require online businesses to collect sales tax.

Why Do You Need a Sales Tax Permit?

A sales tax permit is required by law in most states for businesses that sell taxable goods and services. Without one, you won’t be able to legally collect sales tax from your customers. Failing to get a permit and remit the correct sales taxes can lead to penalties, fines, and even the closure of your business.

But beyond the legal requirements, having a sales tax permit also has practical benefits:

  • Compliance: A sales tax permit ensures that you’re complying with your state’s tax laws, which helps you avoid any legal issues down the road.
  • Ability to Purchase Wholesale: Many wholesalers won’t sell to you unless you have a sales tax permit, as they need to know you’re purchasing goods for resale and not personal use.
  • Legitimacy: Customers tend to trust businesses more when they see you’re properly registered and collecting sales tax. It makes your business look more professional and credible.

How to Get a Sales Tax Permit

The process for obtaining a sales tax permit varies by state, but here’s a general overview of what you need to do:

  1. Register with Your State’s Department of Revenue: In most states, you can apply for a sales tax permit online through the Department of Revenue or a similar agency. Some states may charge a small fee, while others offer the permit for free.
  2. Provide Basic Business Information: During the application process, you’ll need to provide details about your business, such as your business name, address, and Employer Identification Number (EIN) from the IRS. You may also need to provide details about the types of products or services you’ll be selling.
  3. Receive Your Permit: Once your application is approved, you’ll receive your sales tax permit. Be sure to keep this document in a safe place, as you may need to provide it to wholesalers, suppliers, or state officials.
  4. Start Collecting Sales Tax: After you have your permit, you can legally start collecting sales tax on taxable items or services you sell.

Final Thoughts

A sales tax permit is a crucial part of running a business that sells goods or services. If you’re required to collect sales tax, getting this permit should be one of the first steps in setting up your business. Without it, you could face fines and legal trouble, not to mention the headache of dealing with unpaid taxes.

Remember, the rules and regulations around sales tax permits can vary depending on your state and the nature of your business, so it’s always a good idea to check with your state’s Department of Revenue or consult a tax professional to ensure you’re following the correct procedures. By doing so, you’ll keep your business compliant and avoid any surprises come tax time.

We can help. Ask us about our LLC and corporate startup packages! As your business services law firm, we make sure you’re on solid legal footing from the very beginning.

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