Background: An LLC taxed as an S corp is same as a straight S corp. In addition to being a shareholder, the owner-officer of an S corp who performs services on behalf of the S corp is considered to be an employee of the S corp.
Therefore, there are two primary ways in which an owner-officer of an S corp would take funds out of the S corp:
In an S corp, only salaries paid to employees are subject to employment taxes; shareholder distributions are not subject to employment taxes. The same would apply to the owner-employee of an LLC that is taxed as an S corp. This is in stark contrast to an LLC that does not make an election to be taxed as an S corp. By default, a single-member LLC (an LLC with only one owner) is a disregarded entity for tax purposes and treated by the IRS (Internal Revenue Service) as a sole proprietorship. Just like any other sole proprietor, the owner of this type of LLC is considered to be "self-employed" and, in addition to income tax, must pay a self-employment tax equal to 15.3% on net earnings from self-employment.
The self-employment tax is made up of two parts: .
The self-employed owner of an LLC does not take a salary for his or her services. He or she can take an "owner's draw", or withdrawal of capital, if desired. But the total net income would still be subject to self-employment tax as previously explained (as well as income tax), whether the owner takes an owner's draw or not.
Advantages of LLC Taxes as an S Corp vs. a straight S Coporation:
General Comment: Keep in mind that an LLC taxed as an S corporation may not be beneficial to everyone.
For example, in California a licensed professional cannot form an LLC so their best option may be a corporation. Because you have three months to file for S Corporation tax status, make it a priority to seek professional assistance before making the final decision. For many small business owners, however, the ease of management that a Limited Liability Company offers combined with the lower taxes of an S Corporation make this decision an easy one to make. A The LLC can do whatever it wants, but it's going to lose S status if it doesn't have a single class of "stock."
Distributions are going to be based on the operating agreement but they had better be in simple proportion to membership interests, unless you can be clear that some of them will be treated as payment for services (or something else) rather than on account of owning the interest. You can have different classes of members to give different control rights, but not different entitlements to distribution.
Note: An LLC can have whatever members and income it wants. If it has too many members, multiple classes of stock, ineligible shareholders, or any other disqualifying element, it wil lose its status as an S corporation, the same as with any other corporation.
Problems with LLC Taxed as Corporation: