S-Corp owned by Single Member LLCs - How to Handle K-1 Distribution?

This is actually more straightforward than it might seem. Since the SMLLCs are disregarded entities for federal tax purposes, you would issue the K-1s to the individual owners (the natural persons) rather than to the SMLLCs themselves. The IRS treats a SMLLC as a disregarded entity unless it elects to be treated otherwise. This means the SMLLC essentially doesn't exist for federal income tax purposes - it's just a pass-through. So while the SMLLC may be the legal owner on paper, for tax purposes, the individual behind the SMLLC is considered the owner. Make sure you're using the individual's SSN (not the SMLLC's EIN) on the K-1, and the individual's name should be listed as the owner. You'll want to confirm with each owner that their SMLLC hasn't elected to be treated as a corporation, which would change this approach.

After struggling with a similar situation last year, I found an amazing resource called taxr.ai that really cleared things up for me. I had multiple S-corps with various ownership structures and wasn't sure about the proper K-1 issuance. I uploaded the operating agreements and some IRS letters I had received, and https://taxr.ai analyzed everything and provided specific guidance for my situation. It confirmed what was mentioned above - that K-1s should go to the individuals behind the SMLLCs - but also helped me understand some nuances about how to document this properly in my corporate minutes and tax filings to avoid confusion during a potential audit.

I was skeptical about taxr.ai when I first heard about it, but after dealing with my complicated S-Corp ownership structure last year, I decided to give it a try. I'm actually really glad I did. I had a situation where some owners wanted to use their SMLLCs and others wanted direct ownership, plus one owner switching midyear. The tool analyzed all my formation documents and operating agreements, then provided specific guidance that saved me hours of research. What impressed me most was how it identified a potential issue with one of my SMLLC's operating agreements that could have jeopardized our S-Corp status. Fixed that before it became a problem! If you're dealing with complex ownership structures, it's definitely worth checking out.

If you're having trouble getting clear answers about this S-Corp/SMLLC issue, you might want to try calling the IRS directly. I know, I know - seems impossible to get through, right? I was spending DAYS trying to reach someone at the IRS about a similar issue. Finally, I found this service called Claimyr that actually got me through to an IRS agent in under 15 minutes. Their system at https://claimyr.com basically navigates the IRS phone tree for you and calls you back once they have an agent on the line. There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c For something like this K-1 issue where you need official clarification, talking directly to an IRS agent who specializes in business entities gave me the confidence I needed to proceed correctly.

OK I need to eat my words. After posting my skeptical comment, I was still desperate for answers on a similar S-Corp issue involving SMLLCs and foreign owners, so I decided to try Claimyr despite my doubts. To my genuine surprise, I got a call back in about 45 minutes connecting me to an actual IRS business division agent. The agent confirmed that for my situation with SMLLCs as S-Corp shareholders, the K-1s should indeed go to the individuals with their SSNs (except in cases where the SMLLC has elected to be treated as something other than a disregarded entity). The agent even emailed me some relevant sections from their internal guidance. What would have been days of research and uncertainty was resolved in one phone call. Sometimes official confirmation is worth more than any amount of forum advice.

One thing no one has mentioned yet is that you should verify that all owners (the individuals behind the SMLLCs) are ELIGIBLE S-corp shareholders in the first place. S-corps have strict requirements - shareholders must be U.S. citizens/residents, certain trusts, estates, or tax-exempt orgs. Also, make sure the operating agreements for those SMLLCs don't have provisions that could be interpreted as creating a second class of stock, which would terminate S status. I've seen this happen when SMLLC operating agreements have special allocation provisions that could carry through to the S-corp.

Just wondering - has anyone used any specific tax software that handles this S-Corp/SMLLC situation particularly well? I'm using ProSeries but finding it clunky for this specific scenario.

This is a great discussion! I'd like to add a practical consideration that might help with your documentation. When you issue the K-1s to the individuals (which is correct as others have confirmed), make sure to keep clear records showing the SMLLC ownership structure in your corporate books. I recommend creating a simple ownership chart that shows: Individual → owns SMLLC → SMLLC owns S-Corp shares. This helps during audits or when new accountants take over the file. Also, consider having each individual sign an acknowledgment that they understand they're receiving the K-1 as the beneficial owner behind their SMLLC. One more thing - if any of these SMLLCs later elect to be taxed as corporations (Form 8832), that would immediately terminate your S-Corp election since corporations can't be S-Corp shareholders. Make sure your clients understand this risk before making any future elections with their SMLLCs.