The Perils of Electing S Corporation Status

Some advisers recommend electing S corporation tax status for a limited liability company (LLC) ¹ or partnership, or recommend simply organizing a closely held business as a corporation that elects to be taxed as an S corporation. These advisers generally cite the self-employment tax savings that can be achieved as an S corporation relative to an LLC classified as a partnership. More recently, S corporation proponents additionally cite the ability to scale wage payments to shareholders to potentially increase the 20 percent deduction for qualified business income under new Section 199A. ² As explained below, the asserted tax savings of S corporation status are often illusory or negligible, and the very real and very significant disadvantages of S corporation status are rarely given adequate consideration. For this reason, electing S corporation status for an LLC, or organizing an entity as an S corporation, is rarely advisable. ³