Why would anyone elect to be taxed as an S Corporation instead of a limited liability company taxed as a partnership?

In an S Corporation, a shareholder can also be an employee and receive W-2 wages. In that case, the entity and the employee/shareholder pay their respective shares of Social Security and Medicare taxes. Profits in excess of the W-2 wages are not subject to Social Security and Medicare taxes. In contrast, in a limited liability company, an owner cannot be treated as an employee and must pay self-employment tax on all income "passed through" to that owner.

This difference in treatment, as well as a number of other tax rules, sometimes creates a material tax advantage to electing S Corporation tax status. A careful analysis of your business by your tax advisor is necessary to determine whether, in your particular situation, the tax advantages of electing S Corporation taxation outweigh the disadvantages of being an S Corporation.

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