LLC vs S-Corp in Arkansas

The Arkansas Secretary of State handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. The Arkansas Department of Finance and Administration administers state income tax. A flat franchise tax is collected by the Arkansas Secretary of State. An Arkansas LLC can elect to be taxed as an S corporation for federal purposes. Arkansas LLC basics. - Articles of Organization filed with the Arkansas Secretary of State. Confirm current filing fee on the Secretary of State fee schedule. - Annual Franchise Tax Report filed with the Arkansas Secretary of State by May 1 each year. LLC flat franchise tax is $150 per year. Late filing triggers a $25 penalty plus interest. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. Arkansas income tax. - Arkansas has a graduated individual income tax; the top rate has been reduced by legislative schedule in recent years. Confirm the current top rate with DFA. - Pass-through income from an LLC flows to the owner's Arkansas individual return. - Federal S corp status is recognized by Arkansas. The S corp files AR 1100-S. Shareholders report pass-through income on individual returns. Arkansas S corp basics. - Federal S corp election is recognized by Arkansas. - The S corp still owes the $150 annual LLC franchise tax (or the corporate franchise tax if organized as a corporation). - Payroll. An S corp owner-employee must take a reasonable W-2 salary. Arkansas state withholding and state unemployment tax through AR Division of Workforce Services apply. Why an Arkansas trades shop might still elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. The $150 flat franchise tax applies either way. Rule of thumb. Start as an Arkansas LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Arkansas construction clients can run the breakeven for your numbers and confirm current state income tax rates.