When forming an entity for your business you may wonder can an S corporation be a member of an LLC or limited liability company? Jean Scheid, owner of an LLC takes a look at LLCs and who can be a member.
Who Qualifies as an LLC Member?
Unlike a Subchapter or S Corporation where only individuals can become stockholders, in an LLC or limited liability company, individuals, S Corporations, and even other LLCs can be a member.
Most corporations offer shares or stock certificates, where an LLC offers member certificates or units. LLCs don’t use bylaws either, but instead an operating agreement.
Why Use an LLC as a Member in an S Corp?
Both limited liability companies and S corporations are considered pass-through entities. What this means is that the company’s profits (or losses) are not taxed at the company level but passed to the stockholder or in the case of an LLC, it’s members in the form of a K-1 earnings statement.
If you own any part of an S Corporation or shares of stock, you can use those stocks to become a member in an LLC. Even if you own an S Corporation with other individuals, you may still utilize only your shares to become a member of an LLC.
Why Is This Beneficial?
Many people who own stock in an S Corporation who choose to use that stock to become a member of an LLC use it for the following benefits:
Taxes – Because an LLC is a pass through entity, meaning profits or losses pass through to its members, when you receive a K-1 from your LLC showing a profit or loss, the K-1 is first issued to your S Corp. Next, because your S Corporation is also a pass through entity, you can use the K-1 from the LLC at tax time and help offset any income you had in the S Corp. For example, say your S Corporation had $10,000 in profits in any given year and the LLC where your S Corp is a member had losses of $15,000. When you receive your K-1 earnings statement issued by the LLC to the S Corp, that $15,000 passes through to your personal income tax return. In the end, the S Corp may have had retained earnings of $10,000, but the LLC had losses of $15,000, so you total annual profits for that year would be negative $5,000, hence a better tax break and possible refund from the government.
Liability – Because an LLC is a separate entity, unlike a partnership, if legal issues occur, when an S Corp is a member of the LLC, you may not be personally responsible for the company’s liabilities, unless personal guarantees are signed on loans.
Relief of Payroll Taxes – When you are an owner in an S Corporation, it’s likely that you will receive wages of some sort that are required by the IRS to have regular deductions such as federal, state, social security, and Medicare. LLC members, on the other hand, are not required to receive wages with deductions, although some do. If you utilize your S Corp to be a member in an LLC you can use any losses the LLC has to offset the tax you might owe on personal wage taxes for underpayment.
Tips on Using Your S Corp
Keep in mind that if you do use your S Corp to become a member in an LLC, speak to your tax professional or tax attorney to find out if it will be beneficial for you in the long run. If you are unsure on how to become a member in an LLC with your S Corp, you should speak to a corporate attorney on how to complete the process to ensure you receive all the benefits of becoming a member of an LLC.