LLC Taxed as a C Corp: Everything You Need to Know
To have your LLC taxed as a C corp, you'll file form 8832 with the IRS. You must have consent from authorized parties to make the change.3 min read
To have your LLC taxed as a C corp, you'll file form 8832 with the IRS. You must have consent from authorized parties to make the change. Some business owners make this election to gain certain tax benefits. The IRS allows LLCs to be taxed like corporations as long as they adhere to all corporate income tax rules for a set period of time.
Corporate Taxation for LLCs
One consequence of being taxed as a C corp is double taxation because the IRS treats corporations as separate taxable entities. The business itself pays taxes and the business's owners (or members) pay taxes on their share of the profits.
To make the switch to C corp tax status, you must have consent of one of the following:
- All members of your LLC
- A properly authorized officer or manager
If one member signs for all, you should have a record that all members consented to the election.
Once you make the election, your LLC will be taxed as a corporation for at least five years before you can change elections. On form 8832, you'll provide names and an Employer Identification Number (EIN) for multi-member LLCs or a name and social security number for single-member LLCs.
Once your corporate tax status is effective, all of the assets and liabilities under your previous business type go to the corporation in exchange for stock shares.
To gain some of the advantages of a corporation, you don't have to give up the simplified structure that LLCs provide. You can still enjoy the simple LLC structure by forming an LLC and then filing form 8832 to be taxed as a C corp. You'll gain benefits of both business types with fewer hassles of running a corporation.
Reasons to Use a C Corp for Your New Business
There are several reasons business owners may opt for C corporation tax status. The biggest advantage of choosing corporation tax status for owners is not taking all of the business income on their own tax return.
Many venture capitalists will only invest in corporations. Because it can be more difficult for venture capitalists to invest (directly or indirectly) into partnerships, they often choose to put their money into corporations instead. If your eventual aim is to attract private equity money or venture capital, using a C corp structure is your best option.
In a C corp, members who work as employees receive W-2s instead of Schedule K-1s. Partnership members can't draw an employee salary in their company, so they receive K-1s. If you want to obtain financing through a bank (for something like a vehicle or house), it's often easier to secure funds by providing a W-2 because that's what financial institutions are used to seeing.
C corp members are often able to get their tax returns filed more quickly than partnership members. That's because partners must wait until they get their K-1s to file their individual taxes, and the company has to complete its return before sending out K-1s.
- Life insurance
- Retirement plans
There can be disadvantages to choosing corporate tax status, too. LLC members avoid double taxation, while corporation members pay taxes at the corporate level and the individual level for income they receive in the form of dividends. If you elect to be taxed as a corporation, you — as a member — will be subject to double taxation. You should carefully consider if electing corporate tax status is worth the cost of being taxed twice. In some cases, it won't be.
While the IRS gives you options as an LLC owner when it comes to taxation, you should weigh the pros and cons of all your choices. Saving on taxes is often a big reason owners choose one election or another, but you should also think about your short- and long-range plans for your company when making such an important decision.
If you need help with LLCs and their requirements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.