LLC as a Corporation: Everything You Need to Know
LLC as a corporation is one option business owners are faced with when forming a business, so it is important to consider all factors when making this decision.3 min read
2. What Is an LLC?
3. What Is a C-Corporation?
5. Taxes: C-Corporations
6. Taxes: S-Corporations
7. Taxes: Limited Liability Companies
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.
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.
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.
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.
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.
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.
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