Good problem to have - Electing S Status

People often start their businesses as an LLC because it is slightly easier to run than a corporation. Sometimes the business becomes very successful and the accountant tells the owners they should have their LLCs taxed like an S-corp to save on taxes.

It is easy to elect S-status – you file a form with the IRS – but why?

The primary reason for a company to do this is because it wants the operational and organizational flexibility of the LLC, but it also wants to reduce self-employment taxes. This is an extremely cumbersome method of doing business and accounting.

I am a firm believer in the KISS principle (Keep It Simple, Stupid). If you want your business to be taxed as an S-corporation, why not just use a corporation rather than a limited liability company? Or start as an LLC and when you are making so much money it makes sense to be taxed as an S-corp, why not convert the entity? This is a good problem to have.

The LLC entity eliminates many of the formalities that a corporation must observe to preserve its corporate status. The LLC does not require bylaws, a board of directors, annual meetings, or minutes, for example.

But electing to be taxed as an S-corporation takes away much of this benefit.