Is the S Corporation Election Right for Your Firm?, 1220 COBJ, Vol. 49, No. 11 Pg. 16

PositionVol. 49, 11 [Page 16]

49 Colo.Law. 16

Is the S Corporation Election Right for Your Firm?

Vol. 49, No. 11 [Page 16]

Colorado Lawyer

December, 2020



The business entity you select for your firm has enormous implications for your annual tax liability. In addition, determining whether (or if) to make additional tax elections with the IRS can be one of the more confusing aspects when establishing a law firm. Which structure is right when you start your firm? Should you start with one structure and modify it down the line? What tax advantages could you gain from a change?

Most firms opt for a structure that limits personal liability and avoids double taxation in the form of a pass-through entity like a limited liability corporation (LLC) or limited liability partnership (LLP). These structures eliminate the double taxation inherent in C corporations, where corporate income is taxed once and payroll is taxed again. But by using an LLC or LLP instead of a C corporation, the tax consequences are still substantial; the income from the business flows through to your personal return and is subject to income tax at your individual tax rate, Social Security (6.2%) and Medicare (1.45%). And the business is liable for the other half of the employee's payroll taxes (another 6.2% + 1.45%). That 15.3% in addition to federal and state income tax is sometimes referred to as the small business tax.

The best way to save money on taxes is to reclassify some of that income, and that process is made much easier if an LLC or LLP elects to be treated as an S corporation for tax purposes. There are a few important considerations. First, taking the S corp election does not change the structure of your company; it changes the way you file the taxes. Instead of filing Schedule C on your personal return (single-member LLC) or Form 1065 (LLPs and multi-member LLCs), you will file a separate S-corporation return (Form 1120-S). So if you are incorporated as an LLC, you will stay an LLC, but you will be treated as an S corporation when you file your taxes.

Who Can Take the S Corp Election?

There are a few rules about who can take the S corp election, including:

■ You must be a domestic corporation and file Form 2553.

■ You must have no more than 100 shareholders. Spouses and their estates can count as only one.

■ Your shareholders must be only individuals...

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