Many times when I’m helping new small business owners, they ask me questions about what kind of business entity they should form. Many have heard about a Limited Liability Company (LLC) and want to know more about personal asset protection and the potential to save on taxes.

Here’s the real scoop: While you may certainly realize savings through an LLC, expect to pay more bookkeeping and accountants’ fees to file those taxes.

A new business usually starts life as a sole proprietor whose tax return consists of a Schedule C Profit and Loss form added to his or her usual 1040 tax return. Under sole proprietorship, the owner must pay income tax on business profits at the federal and state level as well as the Medicare and Social Security taxes (an additional 15.3 percent) for him or herself as the owner. After a year or two of good profits, the average business owner starts looking for some tax relief.

How does an LLC help? Forming an LLC is not an immediate tax fix, but it provides the platform from which a number of tax elections can be made to ultimately reduce the tax burden. Once organized in a state as a business entity, the LLC can make an election with the IRS to be treated, for tax purposes, like something else—a corporation or a partnership. Just remember that a partnership needs more than one owner, and overall it is a lousy way to limit your tax liability. It’s easy to get into, but it can be as tough to get out of as a bad divorce.

Understanding S-corp tax status when using an LLC

What most people are really looking for is S-corp status, and there’s a multi-step process to get you from LLC to S-corp.

1. The LLC makes an election on Form 8832, Entity Classification Form, to be treated as a corporation. The form and the filing are both free.

2. Make the S-corp election. Use Form 2553, Election by a Small Business Corporation, to request this favorable tax status. Again, the form and filing are free. Each member of the LLC must consent and sign. Be aware that the election window is small: The due date is 75 days from January 1.

3. The newly minted LLC must have a Federal Employer ID number (FEIN or EIN) before asking for the tax treatment discussed above. Use Form SS-4 to get this required ID number, which is also free.

At this point, the LLC is treated for tax purposes as an S-corp. This means that a separate tax return, Form 1120S, must be completed and filed by March 15 of each year reporting the profits, losses, balance sheet, and assets.

All these steps can lead to some tax savings. The profit from the S-corp is not subject to Medicare and Social Security tax, so a tax savings of 15 percent can be realized. However, keep in mind that the bookkeeping and tax filing requirements usually require hiring an Enrolled Agent or CPA for assistance. Additionally, the owner/shareholder of an S-corp must be a W-2 employee with a reasonable salary, so payroll is required. If you can make the math work, setting up your business as an LLC might save you a good chunk of change with the IRS.

Bill Nemeth and Merry Brodie are both Enrolled Agents and the founding partners and owners of Tax Audit Guardian, an Atlanta-based group of professionals who specialize in assisting troubled taxpayers. The married couple also recently sold their 24 Jackson Hewitt Tax Service franchises. Additionally, Brodie works with small businesses as owner of Brodie Accounting Services and Nemeth is active in education and membership arms of the Georgia Association of Enrolled Agents.