LLC Taxed As C Corp: Deciding on the best tax structure for your small business can be confusing. Limited liability companies (LLCs) provide business owners with flexibility when it comes to taxation. While LLCs are pass-through entities by default, they can elect to be taxed as C corporations if certain requirements are met.
This guide will explain what it means for an LLC to be taxed as a C corporation. We’ll cover the reasons to choose this tax status, how it impacts taxation and filings, key pros and cons to weigh, and more. By understanding LLC taxation as a C corporation, you can determine if this structure makes the most sense for your startup or existing small business.
If an LLC Taxed As C Corp? LLCs offer business owners options when it comes to federal taxation. An LLC taxed as a C corporation means the IRS will view and tax the entity as a C corporation, even though it is an LLC legally. This offers some advantages like attracting investors, but also has drawbacks like double taxation. Business owners can elect for LLC taxation as a C corporation by filing IRS Form 8832. This subjects the LLC to filing a Form 1120 annually and taxation of profits at the corporate level. The IRS also taxes distributions to owners. Key pros of an LLC taxed as a C corp include no limits on ownership interests and the ability to pay W-2 wages to owners. However, double taxation and increased operating costs are notable downsides.
Reasons To Choose C Corporation Tax Status
Before electing C corporation tax treatment, LLC owners should understand the potential benefits this structure can provide:
Attracting Investors
C corporations can have unlimited shareholders without restrictions. This makes them attractive for raising capital from investors. An LLC taxed as a C corp can similarly attract investors since there are no limits on issuing ownership interests.
Paying W-2 Wages to Owners
LLC owners pay self-employment taxes on their share of profits. But owners of an LLC taxed as a C corporation can be employees and pay themselves reasonable wages. Owners only pay payroll taxes on W-2 income.
Business Deductions
C corporations allow owners to deduct certain benefits like medical expenses and retirement contributions without limits. LLC owners have restrictions on the amount they can deduct.
Lower Corporate Tax Rates
The maximum corporate tax rate may be lower than the top personal tax rate applied to pass-through business income. This can reduce taxes for highly profitable LLCs.
How an LLC Taxed as a C Corporation Works
Electing C Corporation Tax Status
An LLC isn’t automatically taxed as a C corporation. To elect C corporation treatment, the LLC must file IRS Form 8832. This form allows eligible entities like LLCs to select their tax classification.
The LLC owners must consent to electing C corporation status for tax purposes. This election means the IRS will view the LLC as an association taxable as a corporation going forward.
Filing and Tax Requirements
An LLC taxed as a C corporation must file Form 1120 annually for corporate tax returns. The C corporation will pay federal income taxes on its profits at rates up to 21%.
Owners will also owe individual income taxes on any dividends or distributions received from the C corporation. This results in double taxation of profits.
The LLC taxed as a C corporation will need to handle payroll taxes. Owners who are employees will receive W-2 wages they must pay taxes on like other earners.
Key Pros of an LLC Taxed as C Corp
No Ownership Restrictions
Unlike S corporations, there are no limits on the number or type of shareholders if an LLC elects C corporation status. This provides flexibility for raising capital.
Lower Payroll Taxes
Paying W-2 wages to owners can reduce self-employment taxes owed. Owners only pay their portion of payroll taxes on salaries.
Attractive to Investors
The C corporation structure is familiar to investors. Having no limit on shareholders allows for issuing stock to investors.
Corporation Business Deductions
Certain deductions like for fringe benefits are not restricted for C corporations like they are for pass-through entities.
Notable Cons of an LLC Taxed as C Corp
Double Taxation
The C corporation pays taxes on net income. Owners also owe taxes on dividends, resulting in less profit after taxes.
Increased Operating Costs
Corporate tax compliance requires keeping minutes and formal records, holding director/shareholder meetings, and issuing stock. This can increase accounting and legal fees.
Self-Employment Loss for Owners
Owners who are employees do not have self-employed status for Social Security and Medicare. This can impact retirement benefits.
Restrictions on Selling
If the LLC elects S corporation status later, certain gain recognition rules apply. This can limit some tax strategies when eventually selling.
Key Factors When Considering LLC Taxation as a C Corporation
- Will you issue ownership shares to investors for capital? No limits as a C corp.
- Do you want to minimize self-employment taxes by drawing a salary? Possible as a C corp.
- Is the lower 21% corporate tax rate beneficial vs personal taxes? Run projections.
- Can you justify increased operating costs that come with C corps? Factor these in.
- Are you concerned about double taxation on profits and distributions? Often a challenge.
Conclusion
Electing C corporation tax status for your LLC provides some advantages, like attracting investors. But downsides also exist such as double taxation. Carefully weighing the pros and cons based on your goals and situation allows determining if LLC taxation as a C corporation makes sense. Discussing options with legal and tax professionals can further clarify the best structure.
Frequently Asked Questions
Can an LLC be taxed as a C corporation?
Yes, an LLC can elect to be taxed as a C corporation by filing IRS Form 8832. This subjects the LLC to corporate taxation rules.
What happens when an LLC is taxed as a C corporation?
The LLC will file Form 1120 annually and pay taxes on net income. Owners will also owe individual taxes on dividends or distributions received.
Is an LLC taxed as a C corporation a good idea?
It depends on the situation. Key pros include attracting investors and lower payroll taxes for owners. Cons involve double taxation and increased costs.
What tax form does an LLC taxed as a C corporation file?
An LLC taxed as a C corporation must file Form 1120 each year to report income, deductions, taxes, and distributions made.
Can an LLC taxed as a C corporation later elect S corporation status?
Yes, an LLC taxed as a C corporation can file Form 8832 later to change its status to an S corporation if it meets the eligibility requirements.
This article is created with the aid of automated technology and then carefully reviewed and verified for accuracy by our professional editors.
