Under the IRS “check the box” regulations, a
Florida Limited Liability Company with two or more members is automatically taxed for income tax purposes as a partnership. As a result, all income that passes through a partnership to a partner is classified as self-employment income subject to payroll taxes.
The entity may alternatively elect to be taxed as an
S corporation for income tax purposes. The election can be made by filing Form 2553 with the IRS.
The benefits of an LLC electing to be taxed as an S corporation, for income tax purposes, include treating a substantial portion of earnings as wages subject to payroll taxes, and the balance as dividends that are not subject to payroll taxes. To maintain this income tax status, the LLC is required to satisfy all of the qualifications for a “
small business corporation.” If the LLC fails to meet all of the required qualifications, the S election will not be valid and the LLC will be taxed as a C corporation and subject to double taxation.
Problems can also arise when drafting an LLC Operating Agreement. Standard partnership law concepts and verbiage (treasury regulations that govern partnerships, capital accounts and capital account maintenance, special and regulatory allocations of income and loss, and liquidating distributions in accordance with capital account balances) are included in most LLC Operating Agreements. These provisions should not be included in a qualifying “small business corporation” and their inclusion may disqualify the LLC from making an S election.
