LLC as Corporation: Everything You Need to Know
An LLC as corporation is an advantageous step for tax reasons and it is an organization formed under articles of organization and an operating agreement.3 min read
An LLC as corporation is primarily an advantageous step for tax reasons. An LLC is defined as one or more members who form an organization under articles of organization and an operating agreement. An LLC is most notable for its pass-through taxation method, where losses and profits pass through the LLC to individual members. Compensation is determined by each member’s share in the LLC.
On the other hand, a corporation is a distinct business entity that’s formed by articles of incorporation. A corporation is governed by a board of directors who oversee everyday aspects of the business. Each shareholder is designated a certain amount of shares based on the amount invested in the company.
All business organizations must register as some form of business entity in the state where business operations take place. States recognize the following business entities:
Choosing which entity suits your business best will depend on your goals and what type of tax advantages you desire, which is why you should seek the advice of an attorney or accountant if you are unsure which entity is best you. It’s worth noting that not all attorneys and accountants are fully aware of all current LLC laws, which is why you should always conduct your own research as well.
LLC vs. Corporation
An LLC has a more central management set-up than corporations do. In addition, any member can be the organization’s manager, or the business can choose to give no distinction between the manager and owner.
Corporations operate under a board of directors that delegate responsibilities to other parties (officers), who handle all of the daily business operations. Unlike LLC members, board members separate themselves from everyday decisions of the business, with the exception of major business decisions, and only have the power to appoint directors. With that, shareholders can also be elected as directors or officers.
When it comes an LLC and corporation, the IRS places them in two categories for tax purposes:
- LLC: Sole proprietorship/partnership
- Corporation: C-corporation/S-corporation
Many new business owners mix up these concepts, but it is simply the manner in which the IRS classifies all business entities.
Which Is Best for You?
Depending on your needs, you can choose a tax form that yields the lowest form of taxation. Personal tax rates on partnerships and sole proprietorships are generally higher than the highest rates on corporations.
In essence, your taxable income in the form of adjusted gross income, including net income, tends to be high. For this reason, it would be prudent to remove your LLC from the personal taxation category and into a corporate structure.
The primary advantage of an LLC being taxed as a corporate entity is the owner not having to report all business income on a personal tax return, which would subject the owner to higher taxes.
You may combine an LLC and an S corp, but you must file a request to do so.
However, the IRS has certain restrictions on an S Corp when compared to an LLC:
- LLCs are allowed to have as many members as desired, while S corps are restricted to no more than 100 shareholders.
- Non-U.S. citizens and residents can become members of an LLC, but S corps restrict such members.
- Other entities such as S corps, C corps, LLCs, and partnerships cannot own S corps, but LLCs can be owned by other business entities.
- LLCs are allowed subsidiaries with no restrictions.
S corp vs. C corp
An S corp is classified as a standard corporation that can be taxed via the pass-through tax method. All yearly income passes from the corporation to individual shareholders to file on business income tax returns. This also prevents S corps from a double tax, which would be a tax on the business and another tax on the owners. In essence, S corps are taxed as partnerships. One of the few drawbacks of an S corp is that only smaller ones typically qualify, and they are restricted to only one stock class.
C corps are the standard structure of a corporate entity when owners file articles of incorporation. Like LLCs, C corps distinguish personal and business assets, safeguarding them from lawsuits. You may also combine a C corp and LLC, but doing so would not make sense in most cases due to the issue of double taxation. However, it can be advantageous in certain respects. For example, an LLC owner can choose C corp classification to attract investors and raise equity.
To learn more about an LLC as corporation, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will help you establish the best tax structure for your LLC based on your goals and preferences. Our lawyers will also help you navigate the IRS tax system so you can save on taxes and use the extra money to expand your business.