The choice of the proper legal structure is one of the most important choices a business owner must make when launching a venture. Because it combines the advantages of a corporation and a partnership, a limited liability company (LLC) is a popular choice for many small business owners. However, LLCs also have flexible tax treatment options. This begs the question: Can I alter the tax treatment of my LLC?
Yes, it is the answer. An LLC has a choice in how the IRS taxes it. An LLC is taxed by default as a pass-through entity, which means that its gains and losses are reported on the owners’ individual tax returns. But LLCs also have the option of choosing between C or S corporate taxation.
Which is better, an LLC or a C corporation? It relies on the particular requirements and objectives of the company. C corporations are subject to double taxation, which means the company must pay taxes on its income as well as the shareholders’ dividends. However, C corporations are a better alternative for companies looking for outside investment because they provide more flexibility in terms of ownership and stock options.
However, LLCs don’t have to pay taxes twice, and gains and losses are transferred to the owners’ individual tax returns. Significant tax savings may result from this, particularly for newly established small firms. Furthermore, compared to C companies, LLCs have fewer documentation and compliance requirements.
The current C corp tax rate for 2020 is a flat 21% for those who still like the C corporation tax structure. To choose to be taxed as a C corporation, LLCs must take particular actions. The LLC is required to submit Form 8832 to the IRS identifying itself as an association subject to corporate tax. In addition, the LLC needs to submit Form 1120, the corporate tax return, and acquire an employment identification number (EIN).
In conclusion, LLCs have a choice in how the IRS taxes them. While LLCs offer tax benefits and less paperwork, C companies allow greater ownership and stock option flexibility. For individuals who still want the C corporation’s tax structure, there are specific actions that must be taken in order to opt to be taxed as a corporation. The ideal option for your company ultimately depends on your unique demands and goals.
The relative merits of an LLC versus a C Corp rely on the particular requirements and objectives of the business owners, therefore there is no clear winner in this debate. However, because of its more adaptable administration, pass-through taxation, which means that the company’s revenues and losses are reported on the owners’ personal tax returns, and simpler structure, an LLC may be a better option for small enterprises and startups. Contrarily, a C Corp. is subject to double taxation, which means that the company’s income are taxed once at the corporate level and once more when distributed to shareholders as dividends. A C Corp. also has a more complicated organizational structure and demands more formalities and paperwork. The ideal form will ultimately be determined by the type of business, the number of owners, the level of liability protection sought, and tax considerations.