Ignacio has guided elk hunters and fly fishermen out of Taos for other outfitters for a decade. This winter he and a partner plan to open their own operation, with horses, two trucks and an SBA loan application. The lender’s checklist asks what kind of entity the borrower is, and a friend swears an S corporation will save a fortune in taxes.
That is half a tax answer and no credit answer. What matters is the tax two owners will really pay at their profit level, and what the entity will not shield when a loan goes bad. This post states the law as of October 27, 2026.
Does forming an LLC protect me from an SBA loan I personally guarantee?
No. Under 13 C.F.R. § 120.160(a), holders of at least 20 percent of an SBA borrower “generally must guarantee the loan,” so both owners would sign personally regardless of entity. COVID-era EIDL loans above $200,000 worked the same way, according to the SBA Inspector General’s Report 25-23 (Aug. 12, 2025).
If the company files Chapter 7, it gets no discharge: 11 U.S.C. § 727(a)(1) grants one only to individuals, and § 524(e) says one debtor’s discharge does not change anyone else’s liability on the debt. The guaranty is resolved in the owner’s own case or by negotiation.
A quieter trap: EIDL loan documents restrict ownership and structural changes, which the SBA handles as servicing requests it must approve (see its COVID-19 EIDL page). An S election or conversion can create a technical default, and in my experience the preparer rarely reads the loan agreement first.
How much self-employment tax does a New Mexico LLC owner pay in 2026?
By default, a two-member LLC is a partnership and a one-member LLC is disregarded (Treas. Reg. § 301.7701-3(b)(1)). Either way, each owner’s share of profit is self-employment income under 26 U.S.C. § 1402(a), distributed or not. Section 1401 taxes 92.35 percent of it (after the § 1402(a)(12) adjustment) at 12.4 percent for Social Security, up to the 2026 wage base of $184,500 set by the Social Security Administration, and at 2.9 percent for Medicare with no cap. Above $200,000 for single filers ($250,000 joint), another 0.9 percent applies (§ 1401(b)(2)).
The offset is 26 U.S.C. § 199A, a deduction of up to 20 percent of qualified business income. The One Big Beautiful Bill Act (Pub. L. 119-21, § 70105) removed its 2025 sunset, making it permanent. For 2026, Rev. Proc. 2025-32, § 4.26, sets the threshold at $201,750 ($403,500 joint); below it, the wage and property limits do not apply.
When does an S corporation election pay for itself in New Mexico?
An S corporation pays working owners a salary, taxed under § 3101 and § 3111, and passes the rest through free of payroll tax. The salary must be reasonable. The IRS treats “dividends” paid in place of reasonable pay as wages (Rev. Rul. 74-44), and in Gale W. Greenlee, Inc. v. United States, 661 F. Supp. 642 (D. Colo. 1985), a working sole shareholder’s interest-free “loans” were held to be wages subject to FICA and FUTA. I found no Tenth Circuit decision on S corporation salaries. Salary also is not qualified business income (§ 199A(c)(4)(A)), so it shrinks the 20 percent deduction.
Illustration only. Assume a 50/50 split, each owner files single with no other income, takes the 2026 standard deduction of $16,100, and pays New Mexico tax at the single rates in NMSA 1978, § 7-2-7. At $140,000 of net profit and reasonable salaries of $55,000 each, the election saves each owner about $440 a year in combined payroll and income tax, roughly $870 for both. At $320,000 with $90,000 salaries, it saves about $4,225 per owner, near $8,450 together, or 6 percent of the $70,000 each moved out of salary. Unemployment taxes on salaries would trim both.
Hence my rule of thumb: an S election earns its keep only once the business throws off a few hundred thousand dollars a year, counting the owners’ pay. The saving runs around 6.5 percent of what shifts from salary to distributions and must cover payroll filings, a Form 1120-S, New Mexico’s S-Corp return with the $50 franchise tax (NMSA 1978, § 7-2A-5.1), plus salary audit risk. A two-member LLC swaps these for its Form 1065 and New Mexico PTE return; a one-member LLC adds them.
How does New Mexico tax LLCs, S corporations and C corporations?
An LLC is formed under the Limited Liability Company Act, NMSA 1978, § 53-19-1 et seq.; its tax treatment is a separate federal choice made on Form 8832 or Form 2553. Personal income tax starts from federal adjusted gross income (§ 7-2-2) and, for 2025 and later years, tops out at 5.9 percent above $210,000 of taxable income for single filers and $315,000 jointly. The corporate rate has been a flat 5.9 percent since January 1, 2025 (§ 7-2A-5). Gross receipts tax reaches “any person engaging in business in New Mexico” (§ 7-9-4), whatever the entity.
Many owners miss the elective entity-level tax in NMSA 1978, § 7-3A-10 (2022, amended 2023). A partnership or S corporation may elect, year by year, to pay New Mexico tax on its owners’ income at the higher of the top individual or corporate rate, 5.9 percent for 2026. The election binds every owner, and each gets a credit for tax paid on his share. Under IRS Notice 2020-75, the entity deducts it federally, outside each owner’s 2026 state and local tax cap of $40,400 (26 U.S.C. § 164(b)(7)). But the statute excludes “a single member limited liability company that is treated as a disregarded entity for federal income tax purposes” (§ 7-3A-2(H)(5)), so a one-owner LLC cannot elect unless it has made an S election.
Is the 21 percent C corporation rate a better deal for a small New Mexico business?
Usually not for owners who live on the profit: 26 U.S.C. § 11(b) sets the federal rate at “21 percent of taxable income,” and New Mexico adds 5.9 percent. Retained profit escapes self-employment tax but gets no § 199A deduction, and dividends are taxed again at up to 20 percent under § 1(h)(11), plus New Mexico income tax. It suits a business reinvesting for years. Qualified small business stock under § 1202 is the other draw; the firm’s post on gifting QSBS in New Mexico covers the basics, and a post publishing October 31 takes up QSBS held through an LLC.
The second tax returns at the end. A liquidating C corporation recognizes gain as if it sold its assets at fair market value (§ 336(a)), and shareholders treat what they receive as a sale of their stock (§ 331(a)). In a wind-down, that double layer lands when cash is shortest. See also the firm’s post on revoking an S election before a bankruptcy sale.
What happens to my LLC interest or S corporation stock if I file bankruptcy?
It becomes estate property. 11 U.S.C. § 541(a)(1) takes in “all legal or equitable interests of the debtor in property,” and § 541(c)(1) overrides transfer restrictions and bankruptcy-triggered clauses. A Chapter 7 trustee could sell Ignacio’s half.
New Mexico’s charging-order statute, NMSA 1978, § 53-19-35, limits a judgment creditor to an assignee’s rights and says nothing about one-member companies. In In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003), a sole member’s whole interest passed to the estate, and the trustee, as substituted member, could make the LLC sell its land, because the charging-order limit protects other members and there were none. Albright applied Colorado law and binds no New Mexico court. I have found no New Mexico decision on the point, but a trustee here would likely argue it.
In In re Majestic Star Casino, LLC, 716 F.3d 736 (3d Cir. 2013), the Third Circuit held that S status itself is not property of the corporation’s estate, rejecting earlier bankruptcy court rulings. I have found no Tenth Circuit decision. The firm’s post on Owoc and S elections in bankruptcy covers what that fight means here.
| Issue | LLC taxed as partnership | S corporation | C corporation |
|---|---|---|---|
| Self-employment or payroll tax | On each owner’s full share | On reasonable salary only | On salary; dividends taxed again |
| § 199A deduction | Up to 20% of share | Up to 20% of profit after salary | None |
| New Mexico return and entity-level election | Form PTE; may elect (not a disregarded one-member LLC) | Form S-Corp, $50 franchise tax; may elect | 5.9% corporate tax, $50 franchise tax |
| Owner liability for business debt | Shielded except guaranties | Shielded except guaranties | Shielded except guaranties |
| What an owner’s Chapter 7 trustee gets | The interest; maybe control of a one-member LLC | The shares; S status itself contested | The shares |
Frequently Asked Questions
Does an S election change how my New Mexico LLC is organized?
No. It remains a New Mexico LLC; only its federal tax classification changes. A timely Form 2553 also counts as the corporate classification election, so no Form 8832 is needed.
When is Form 2553 due for the 2027 tax year?
For a calendar-year company, by March 15, 2027, the 15th day of the third month under 26 U.S.C. § 1362(b)(1), or any time during 2026. Every shareholder must consent, and § 1362(b)(5) allows relief for a late election with reasonable cause.
Can a single-member LLC make New Mexico’s pass-through entity tax election?
Not while it is disregarded for federal tax purposes. If it elects S status, it files New Mexico’s S-Corp return and can make the annual election there.
Does my entity choice change New Mexico gross receipts tax?
No. It turns on what you sell and where, not on your entity type.
If my company files Chapter 7, am I off the hook on my SBA guaranty?
No. A company gets no Chapter 7 discharge, and 11 U.S.C. § 524(e) keeps a guarantor liable regardless. The guaranty must be resolved by negotiation or in the owner’s own case.
How North Star Law Firm Can Help
North Star Law Firm advises New Mexico owners on business entity selection, reading the loan documents alongside the tax math, and on gross receipts tax. For owners and businesses that cannot carry their debts, it handles bankruptcy for both.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico. The firm works alongside New Mexico-licensed counsel on state-law questions. If you are weighing an S election, or already made one after taking an SBA loan, contact North Star Law Firm.