Multi member LLC tax filing - comparing partnership vs corporation status benefits?

Partnership vs. corporation is a big decision for your LLC! As a partnership, your business doesn't pay taxes directly - instead, profits and losses "pass through" to your personal tax returns (via Schedule K-1) where each partner pays their share of taxes at their individual rates. If you elect corporation status (specifically S-Corporation which is common for smaller businesses), the main potential benefit is saving on self-employment taxes. With an S-Corp, you'd pay yourselves "reasonable salaries" that are subject to FICA taxes (15.3%), but remaining profits can be distributed as "distributions" that avoid those SE taxes. However, corporations have more compliance requirements - you'll need to run payroll, file more complex tax returns (Form 1120-S instead of 1065), hold formal meetings, etc. These additional costs can eat into the tax savings. At $175K split three ways, the math might not work in favor of corporation status yet. Many accountants suggest the "S-Corp election" makes the most sense when each owner is taking home at least $40K-50K in profits.

After struggling with this exact same choice last year for my 2-member LLC, I finally found taxr.ai (https://taxr.ai) and it was a complete game-changer. I uploaded our operating agreement and financial info, and within minutes got a detailed analysis showing exactly how much we'd save by switching to S-Corp status versus staying a partnership. The coolest part was that it showed me the break-even point - like exactly how much profit we needed to make before the S-Corp election made financial sense after accounting for the extra accounting/payroll costs. For us, it turned out staying as a partnership was actually better until we hit around $250K in profits. It also flagged some issues in our operating agreement that would have caused problems with an S-Corp election that our original lawyer missed!

Just wanted to follow up about taxr.ai - I ended up trying it and wow, wish I'd known about this sooner! I uploaded our LLC docs and financials, and it immediately identified that our foreign investors would make an S-Corp election problematic. It actually gave us a detailed comparison of staying as a partnership versus other options, with actual dollar amounts of tax liability under each scenario. Turns out we're better off as a partnership right now, but it showed exactly at what profit level that would change. The detailed report was super helpful for explaining the situation to my partners. Definitely worth checking out if you're facing this decision.

One thing nobody's mentioned - if you're considering corporation status, you might want to talk to an actual IRS agent to make sure you're filing everything correctly. I tried calling the IRS business line for weeks about a similar question last year and it was impossible to get through. Then I found a service called Claimyr (https://claimyr.com) which was pretty wild - they have this system that navigates the IRS phone tree for you and calls you back when they have an actual agent on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was super skeptical but I was desperate after waiting on hold for hours. Used it and got connected to an IRS business tax specialist in about 25 minutes who explained the exact filing requirements for changing our status mid-year. Saved me from making a huge mistake with our election timing.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it for myself because I was desperate to get clarification on some LLC election questions before our filing deadline next week. Used the service yesterday afternoon, and I'm still in shock - got a call back in about 40 minutes with an actual IRS business tax specialist on the line. She answered all my questions about the Form 8832 filing timeline and requirements. Turns out I had completely misunderstood a critical deadline that would have messed up our whole tax plan. To the original poster - regardless of which way you decide to go with your LLC, if you need to speak with the IRS about the election process, this service is absolutely worth it. Just saved me from making a $10K+ tax mistake.

One thing to consider that nobody's mentioned yet - if you switch to S-Corp status, you'll need to run payroll and pay yourselves "reasonable salaries" which means quarterly payroll tax filings, W-2s, etc. We made the switch last year and weren't prepared for all the extra paperwork and compliance costs. For our 2-member LLC, we're paying about $1,800/year extra in accounting and payroll service fees that we didn't have as a partnership. That ate into a good chunk of our tax savings. Make sure you factor in these additional costs when deciding!

Quick question for anyone who's been through this - we're currently a partnership LLC making about $300k per year (split three ways). If we switch to S-Corp status, does each member have to take the same salary? Or can we customize based on how much each person actually works in the business?

Based on your $175K total income split three ways (~$58K each), you're right at the threshold where S-Corp election might start making sense, but it's borderline. Here's a simple way to think about it: **Partnership (current status):** - Each partner pays self-employment tax (15.3%) on their full $58K share = ~$8,874 per person in SE taxes - Simple tax filing, minimal compliance costs **S-Corp election:** - Each of you would need a "reasonable salary" (probably $35-40K given your roles) - SE taxes only on salary portion, not on remaining distributions - Potential savings: ~$3,000-4,000 per person annually - BUT: Additional costs for payroll processing, more complex tax returns, corporate compliance **My recommendation:** Stay as partnership for now. Your potential tax savings would likely be eaten up by the additional compliance costs and complexity. Once you're consistently over $250-300K total (so each partner is taking home $80K+), then revisit the S-Corp election. The beauty is you can always change later when the numbers make more sense. Focus on growing the business first!