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Subchapter S Election for a Single-Member LLC

Should a single-member LLC choose a Subchapter S election? This article describes a key reason why single-member LLCs should make a Subchapter S election.

Tax Classification of LLCs

Newly formed limited liability companies which have only one member are classified by the IRS for tax purposes as a “sole proprietorship” by default. This classification means that revenues and expenses generated by the LLC will be reported on the member’s own personal tax return under Schedule C.

The LLC may choose to be classified for tax purposes as a corporation under Subchapter S of the Internal Revenue Code. Subchapter S corporations are frequently called “S corporations.” Revenues and expenses for S corporations are reported on Schedule K-1. The information in Schedule K-1 is then included in the member’s personal tax return.

Reason to Make a Subchapter S Election

A key reason to make a Subchapter S election is to avoid self-employment tax. Currently, employment taxes of 13.3% are levied against the first $106,800 of income made by a sole proprietor. However, for corporations (including S corporations), only salaries are subject to such taxes. Profits are not.

As an example, if a sole proprietorship generates $100,000 in income, $13,300 would have to be paid as self-employment taxes. However, if an S corporation generates $100,000 in revenue, and pays $50,000 in salaries, leaving $50,000 in profit, then only $6,650 would have to paid in employment taxes by the employer and employee (13.3% of $50,000); employment taxes are not paid on profit. This saves $6,650 per year.

Please note that salaries paid by corporations have to be reasonable and members of S corporations should plan for quarterly tax withholdings.

How Do You Make a Subchapter S Election?

The LLC must first elect to be classified as a corporation. Following the corporation classification, the member of the LLC then files a document making a Subchapter S election.  There are some restrictions on S Corporations, as described in this article on the IRS website, although they are infrequently relevant to single-member LLCs.

Please contact Lucent Law for more information or assistance in making a Subchapter S election for your single-member LLC.

Lucent Law provides comprehensive legal services in the areas of real estate, business law, and wills, trusts, and estates. Additionally, Lucent Law’s EssentialLaw platform features fixed-fee services for businesses and individuals in the areas of business, real estate and estate planning.

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Single Owner LLC Package

The experienced business law team of Lucent Law, PLLC will form your new single owner Washington limited liability company by preparing and filing a Certificate of Formation and the required Initial Annual Report. This package also features:

  • Our online Rapid Filing service is included (typically, we will file the formation documents within one business day after the questionnaire is completed)
  • A customized Operating Agreement with built-in language to provide for a successor manager to manage the affairs of the LLC in case of incapacity or death of the owner
  • Organizational Minutes and Resolutions to establish the initial decisions that the LLC must make concerning its business and legal affairs.
  • Our EssentialAgent registered agent service at no cost for the first year of registered agent services. Visit our EssentialAgent page at our website for more information.
  • Attorney consultation after formation is available at our standard hourly rates.
  • Access to a secure client portal to access company information
  • The filing fee charged by the Washington Secretary of State’s office of $200.00 is not included in our fee and will be automatically added at checkout.

This LLC Formation Package is designed for one owner (either a single person or entity or a married person whose spouse will not be an identified member).