File a Louisiana S Corp

Thinking about the tax benefits of a Louisiana S corp but aren’t sure how to get started? This article can guide you. We’ll cover the pros and cons of having an S corporation in Louisiana and how we can help you start a limited liability company (LLC) with S corp election.

For some LLC members (business owners), filing as an S corp can provide savings on self-employment tax. For C corporations (the default form of corporation), it can be a way to avoid double taxation.

For more detailed information about S corps, see our “What Is an S Corporation?” page. 

Requirements and Limitations of S Corporations

Before you go too far down the road of S corporation filing, you need to be aware of their limitations and requirements. To qualify for S corporation status, a business entity must:

• Be a domestic corporation or LLC
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only one class of stock
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who hasn’t passed the green card test or the substantial presence test.

If your business entity meets the criteria above, you can apply for an S corp election. 

Louisiana-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income taxes. But what about Louisiana tax purposes?

Louisiana S corps will be taxed just like S corps are taxed at the federal level, but S corp owners in Louisiana have two options. They can be taxed at the entity level or at the shareholder level.

In Louisiana, an S corporation can elect to be taxed at the entity level, just like a C corporation. If the S corporation doesn’t elect to be taxed as a C corporation, it can exclude from its income a proportion of its total income equal to the proportionate share owned by Louisiana resident shareholders (since they should file that income on their own state tax returns).

If a Louisiana S corporation has $100,000 in profits and three owners, two being residents of Louisiana, one from another state, and it has issued 1000 shares and the Louisiana residents own 800 of those shares and the other owner owns the remaining 200, the S corporation can exclude 80% of the profits from the amount used to compute the state tax since the Louisiana owners should have filed that amount on their individual returns. The out-of-state shareholder will also be required to report their share of the income from the S corporation to the state. (See La. Stat. tit. 47.287.732 and La. Stat. tit. 47.287.732.2.)

As if it isn’t painfully obvious, having a Louisiana tax advisor in your corner can really help here.

Filing as an S Corp in Louisiana

To create a Louisiana S corporation, you’ll need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an S corp election form with the Internal Revenue Service (IRS).

S-Corp Election Steps for LLCs

For detailed formation steps, see our Louisiana LLC formation guide.

• Step 1 – Name your Louisiana LLC
• Step 2 – Designate a registered agent in Louisiana
• Step 3 – File Louisiana Articles of Organization
• Step 4 – Create an LLC operating agreement
• Step 5 – Apply for an EIN for your Louisiana LLC

S-Corp Election Steps for Corporations

For detailed formation steps, see our Louisiana Corporation formation guide.

• Step 1 – Choose a name
• Step 2 – Appoint directors
• Step 3 – Choose an Alaska registered agent
• Step 4 – File the Alaska Certificate of Incorporation
• Step 5 – Create Corporate bylaws
• Step 6 – Draft a shareholder agreement
• Step 7 – Issue shares of stock
• Step 8 – Apply for necessary business permits and licenses
• Step 9 – File for an EIN
• Step 10 – Submit your annual report

File form to apply for S corp status

Submit the form to apply for S corp status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One additional caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Pros and Cons of S Corp Filing

While S corp classification does often come with a number of benefits for both C corporations and LLCs, making this election might not be right for all businesses. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. Let’s look at the advantages for LLCs first.

A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could mean substantial savings in taxes.

Self-Employment Taxes 

The members of a standard LLC are considered self-employed. They’re compensated by receiving their portion of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

However, when the members elect S corp status, they can be compensated in two ways: by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One important note here is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of 10 bucks and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation” to the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t 100% clear, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). The courts have supported the IRS’s right to do this.

Advantages of S Corp Status for C Corporations

If you have a C corporation, filing as an S corp does have its benefits:

No Double Taxation

A big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholder’s personal tax return.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. 

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were. 

Writing Off Losses on Personal Income Statements

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct as much as 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some pitfalls compared to a traditional LLC:

Strict Requirements 

As we listed above, S corps have more qualifications than a standard LLC or C corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have such limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe some of the same formalities that C corporations do (such as extensive record keeping), even if they’re not required to. For example, keeping something similar to a corporate records book could be useful if the business is audited.

Additional Bookkeeping and Accounting

Having an LLC that files as an S corporation means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Disadvantages of S Corp Status for C Corporations

S corp status also has its pitfalls:

Shareholders Limitations

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.

Limited Shareholders Types

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have limitations like this.

One Class of Stock

One way C corporations attract investors is to offer preferred stock, but that’s not allowed for S corps.

More IRS Scrutiny

Because of the extra restrictions on S corps, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.

We want to emphasize the importance of having good tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

Interested in starting an S Corp in another state? See below resourses:

• File a Missouri S Corp
• Form a Mississippi S Corp

Get help establishing a Lousiana LLC with S corp tax election

Forming a business, especially one with an S corp election, can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to move forward, we can help you form a Louisiana LLC with an S corporation designation and provide you with valuable support for your business needs moving forward. Contact us today to get started.