When deciding whether to be an LLC taxed as a partnership/disregarded entity, an LLC taxed as a s-corporation or a corporation taxed as a s-corporation, many times people think about the liability protection, the formalities required such as yearly meetings, and the rights given to members verses shareholders. In addition, for tax purposes, people weigh the advantages of being taxed as a partnership/disregarded entity verses being able to take dividends as an s-corporation.
However, one area that many times does not come up in discussion is the costs of being an s-corporation in regards to filings. As an LLC taxed as a partnership/disregarded entity (if you do not have employees), then the taxes are usually fairly simple with the member/s of the LLC paying estimated tax payments quarterly (although this can vary).
Once a decision has been made to elect s-corporation status (whether for an LLC or to set up a corporation to be treated as such), tax filings get more complicated. As an s-corporation, all members/shareholders of the company that perform work are now considered employees. Therefore, the IRS will require that the company file Form 941s quarterly and withhold employment taxes either quarterly, or worse, monthly or weekly. The IRS will also expect estimated tax payments from owners who also are taking dividends in addition to wages. In Colorado, you will probably be required to set up a wage withholding account to withhold Colorado taxes. You will also have to pay unemployment insurance on wages paid to owners and file information about this quarterly. You may also have to pay occupational privilege taxes quarterly rather than yearly.
While it may not seem a lot, many times single owner companies find that the costs (whether in time spent by the owner or actual cost incurred from a payroll company) of operating as a s-corporation outweigh (either monetarily or frustration-wise) the savings the owner is seeing on his/her taxes from the s-corporation.
Prior to deciding whether you want to become a s-corporation, schedule an appointment with your CPA or me, your Denver small business lawyer, today at 720-258-6647.