LLC vs. C Corporation

Choosing Between the LLC and C Corp

For many small business owners, a Limited Liability Company (LLC) offers advantages over a "C" corporation (also known as a "general" corporation). The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of a corporation.

Pass-Through Taxation

The profits of a C corporation are taxed first at corporate tax rates. Then, if the C corporation pays dividends to shareholders, those dividends are taxed a second time at the personal income tax rates of the shareholders. This "double taxation" is avoided by the pass-through nature of LLC taxation. The Internal Revenue Service (IRS) does not consider an LLC itself to be a taxable entity. Instead, the company's earnings "pass through" to the owners, who report their share of profits or losses on their individual tax returns. Only one personal tax return for each member is required, and the company's earnings are taxed only once.

Special Allocations

In a C corporation, dividends to shareholders must be distributed in proportion to the number of shares they own. This is true regardless of the amount of effort an owner put into the business. In contrast, LLC owners can split profits or losses in any way they choose. Therefore, an LLC owner who owns 50% of the company may actually receive more or less than a 50% share of the profits or losses. This scenario, called a "special allocation," must be accomplished in accordance with IRS regulations. Small business owners should consult their accountant or tax advisor for specific guidance regarding special allocations.

Electing Corporate Taxation

Small business owners who want the flexible structure of an LLC but the advantages of corporate taxation can elect for their LLC to be taxed as a corporation. To elect corporate taxation, owners file Form 8832, "Tax Classification Election," with the IRS. This election may allow LLC owners to save on taxes. With corporate taxation, the first $75,000 in income is taxed at corporate tax rates, which are generally lower than the individual tax rates assessed on LLC owners. Electing this status may also make an LLC eligible for certain deductions available only to corporations. For specific guidance, small business owners should consult their accountant or tax advisor regarding this election.

Note: LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation. Owners make this election through the IRS after the company forms with the state.

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Get started on the process of forming your new LLC by completing our short online order form. For personal assistance, contact an LLC Business Specialist at 877-261-9606 (toll-free) or 302-636-5457.

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