LLC Tax As Corporation: Everything You Need to Know
Having your LLC tax as corporation can be a good decision, particularly if you elect S corporation taxation. 3 min read
Having your LLC tax as corporation can be a good decision, particularly if you elect S corporation taxation.
Should You Elect LLC Corporate Taxation?
When you form your LLC, you can make the decision to be taxed as a corporation. Before you make this decision, however, it's a good idea to learn why it's common for LLCs to elect corporate tax status.
In almost every case, a business will choose a tax status that will allow them to pay the lowest taxes possible. Partnerships and sole proprietorships are subject to the personal tax rate, which is at the higher end of the tax scale. In fact, the personal tax rate is higher than the personal tax rate. Choosing to have your LLC taxed as a corporation means your business income won't be included in your personal taxes.
Imagine that the net profit for your LLC in one year is $50,000. If you are operating a single-member LLC, then you would need to report the whole of this profit on your personal return. On the other hand, if you have your LLC taxed as a corporation, you can keep some of the profits in your business, meaning you would not need to pay personal income tax on this property.
With an LLC, the members of your LLC will be subject to double taxation, which is a big benefit of this business structure. However, choosing to have your LLC taxed as a traditional corporation means you will be subject to double taxation. Because of this double taxation issue, you should make sure the reduced take-home rate that comes with the corporate election will make up for the double taxes. You should make sure to consult with a tax professional before choosing corporate status.
Electing Corporate Taxation
There are several important pieces of information you should understand if you're thinking about electing corporate tax status for your LLC:
- You will need to submit Form 8832 to the IRS to make your election.
- Only eligible entities, including LLCs, are allowed to make this election.
- You will be electing to be treated as an association, which is an entity that can be taxed as a corporation.
- Form 8832 requires a signature either by all the members of your LLC or a single member. If you choose to have a single member sign, you should have a company meeting to make sure that all members agree to corporate taxation.
- When making your election, you need to list the names of all LLC members. If you are electing this status for a single-member LLC, you need to include the owner's Social Security number. For multi-member LLCs, include the company's employer identification number.
Your LLC's legal status will be unchanged when choosing to be taxed as an S corporation or corporation. This means the only thing that will be different about your company is your tax treatment.
C Corporation Taxes
Traditional corporations are known as C corporations. By default, your entity will be a C corporation after you have filed your Articles of Organization. The legal structure of C corporations provides a variety of benefits:
- Separating business and personal finances.
- Protecting company owner's assets from lawsuits.
- Allowing the company to raise capital by selling company shares.
When corporate officers are paid, these payments count as wages, subjecting withholdings for Medicare and Social Security to the 7.65 percent FICA tax. The biggest drawback of corporations is that they are subject to double taxation.
Corporations are legal entities that have the ability to earn income. The federal government, as well as the District of Columbia and forty-seven states, taxes income earned by corporations. In addition to this corporate tax, owners of the company must pay personal income tax on their wages. While there are several tax deductions that are available to corporations, these deductions usually won't make up for the double taxation.
Fortunately, smaller companies can choose to be taxed as an S corporation to prevent double taxes.
S Corporation Taxes
S corporations are normal companies that choose to be taxed under Subchapter S of the IRS Code. Instead of being taxed as a traditional corporation, S corporations are treated as pass-through entities, meaning losses and profits are reported on the owner's personal returns.
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