Key Takeaways

  • An LLC can elect to be taxed as a corporation, giving owners flexibility in managing tax obligations and business structure.
  • LLCs offer limited liability protection like corporations but are easier to manage and have more options for taxation.
  • Electing corporate tax status—either as a C corporation or S corporation—can change how profits are taxed and distributed.
  • C corporation taxation may result in double taxation, while S corporation status allows pass-through taxation with potential self-employment tax savings.
  • Choosing whether to operate your LLC as a corporation depends on factors such as business size, profit level, and long-term growth plans.

LLC as a corporation is one option business owners are faced with when forming a business. It can be hard to know which business form is the best, so it is important to consider all factors when making this decision. Corporations and limited liability companies are two main options, but there is also more than one type of corporation to choose from.

What Is Incorporation?

Incorporating a business requires an evolution from a sole proprietor or general partnership into a new, formally recognized company. Through incorporation, the business becomes its own legal business entity, and it is now separate from those who founded the business. Typically, the new company will belong to one of two categories: limited liability company (LLC) or corporation.

Each state recognizes businesses that are formed as limited liability companies, corporations, partnerships, or variations of these entities. While there are some similarities, there are key differences between an LLC and a corporation which can be complex.

LLC as a Corporation Explained

When deciding how to form a business, many owners ask whether they can operate an LLC as a corporation. The short answer is yes—an LLC can choose to be taxed as a corporation while keeping its flexible structure. By default, the IRS taxes single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. However, business owners can file Form 8832 (Entity Classification Election) to have their LLC taxed as a C corporation, or Form 2553 to be taxed as an S corporation.

Operating an LLC as a corporation can be beneficial if the business earns substantial profits and the owners want to retain earnings in the company for growth. It also allows for potential savings on self-employment taxes, especially under the S corporation tax classification

What Is an LLC?

An LLC, or limited liability company, is the newest type of business. One of the many benefits of choosing to form an LLC is that this type of entity is the most flexible, particularly for tax purposes. There are many different ways to tax an LLC, so the owner(s) have the ability to save on taxes.

Advantages of Electing Corporate Status for an LLC

Choosing to treat your LLC as a corporation can provide several benefits:

  • Liability protection: Both LLCs and corporations protect personal assets from business debts and lawsuits.
  • Tax flexibility: LLCs can switch from pass-through taxation to corporate taxation depending on what minimizes total taxes.
  • Growth opportunities: Corporations can issue stock to attract investors or raise capital, which can be appealing for expanding businesses.
  • Professional image: Incorporating can help establish credibility with banks, vendors, and potential clients.

However, electing corporate status can also introduce more formalities, such as filing separate corporate tax returns, maintaining corporate records, and potentially facing double taxation (for C corps).

What Is a C-Corporation?

A C-Corporation is the standard corporate structure. Upon filing the articles of incorporation, the default entity you are forming is a C-Corp. One of the benefits of a standard corporation such as a c-corp is that your personal finances are separated from those of the business. This separation can allow for protection from lawsuits and can also give you the ability to sell shares in the corporation for the purposes of raising investment capital.

Comparing LLC and Corporation Structures

While LLCs and corporations both offer liability protection, they differ in ownership, taxation, and operational structure:

Feature LLC Corporation
Ownership Owned by members Owned by shareholders
Management Flexible—managed by members or managers Managed by a board of directors
Taxation Pass-through by default; can elect corporate taxation C corps face double taxation; S corps use pass-through
Compliance Minimal annual requirements Must hold annual meetings and file reports
Raising Capital Limited, unless taxed as corporation Easier to issue stock to raise funds

This flexibility allows LLCs to mimic the benefits of incorporation while avoiding many of its administrative burdens.

Taxes

One factor in deciding whether to form a corporation or a limited liability company is the tax burden of your business. There are different rules for taxes applied to LLCs and corporations. There are also different rules for taxation between different types of companies.

Taxes: C-Corporations

When forming a corporation, you create a separate legal entity. That legal entity is capable of earning income. One big disadvantage to having your business designated as a corporation is that there are double tax implications.

The federal government and 47 states, along with the District of Columbia, place taxes on any corporate income. In addition to that, you are also responsible for paying income taxes on any income you earn for yourself while running your business. While there are federal tax deductions that are only available for corporations, these deductions generally are not of enough benefit to make it worth paying taxes twice.

Taxes: S-Corporations

An S-Corporation is a corporation that is designated to be taxed according to Subchapter S of Chapter One of the Internal Revenue Code. The way this works is that when the business is designated as an S-Corporation, it becomes taxed as a pass-through structure. This type of taxation allows for annual income to flow through the corporation and go directly to the shareholders. The shareholders then pay their income tax.

Despite the taxation benefits, there are some drawbacks to electing to form an S-Corp, such as the following:

  • Larger corporations are not eligible for S-Corp designation (no more than 100 shareholders).
  • There can only be one class of stock.
  • Depending on the state, there can be a tax on net income for S-Corps.

Taxes: Limited Liability Companies

Although limited liability companies have not existed as long as corporations have, they make up a greater percentage of business entities than corporations do. The main reason for LLCs surpassing corporations in this way is because of the taxation benefits available for LLCs.

An LLC with just a single member is taxed as a sole proprietorship. Single-member LLCs require the individual member to file a Schedule C for their tax return. When an LLC has multiple members, the LLC is then taxed as a partnership. For taxes, the partnership will file an information return using a Form 1065. Each member or partner of the LLC will also file a Schedule K-1.

How to Elect to Tax Your LLC as a Corporation

To treat your LLC as a corporation for tax purposes, you must submit the appropriate election form to the IRS:

  • C corporation election: File IRS Form 8832 to classify your LLC as a corporation. The LLC will then be taxed separately from its owners, paying corporate income tax on profits.
  • S corporation election: File IRS Form 2553 if you want your LLC taxed as an S corporation, allowing profits and losses to pass through to owners while potentially reducing self-employment taxes.

Example:If an LLC owner earns $120,000 annually, electing S corporation status could reduce self-employment taxes by designating part of the income as salary and part as distributions, which are not subject to self-employment tax.

When making this decision, consider:

  • Expected profits and whether they justify corporate-level taxation.
  • The number of members and eligibility for S corp status (limited to 100 shareholders).
  • The complexity of additional filing and payroll requirements.

When It Makes Sense for an LLC to Elect S Corporation Status

Electing S corporation status can make sense for LLC owners who:

  • Earn consistent profits above a reasonable salary.
  • Want to reduce self-employment taxes by taking distributions in addition to wages.
  • Meet the IRS ownership limits (U.S. citizens or residents and fewer than 100 shareholders).

However, S corporations must follow stricter administrative requirements, such as maintaining payroll records, filing quarterly taxes, and adhering to salary reasonableness rules set by the IRS. Noncompliance may result in penalties or loss of S corporation status

Frequently Asked Questions

1. Can an LLC be taxed as both a C corporation and an S corporation?

Yes. An LLC first elects to be taxed as a C corporation using Form 8832, then may elect S corporation taxation by filing Form 2553, if eligible.

2. Why would an LLC choose corporate taxation?

An LLC might elect corporate taxation to reduce self-employment taxes, retain earnings for growth, or appeal to investors seeking a more formal structure.

3. What are the downsides of taxing an LLC as a corporation?

Potential double taxation for C corporations, increased paperwork, and stricter compliance requirements can make this option less suitable for smaller businesses.

4. Can an LLC switch back from corporation taxation to pass-through status?

Yes, but switching back is subject to IRS approval and may have tax consequences. Consult a tax professional before making this change.

5. Do states recognize LLCs taxed as corporations?

Most states follow federal tax elections, but some require separate state filings or charge franchise taxes. Always check your state’s specific requirements.

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