Due to its adaptability and liability protection, Limited Liability Companies (LLCs) are favored corporate structures by small business owners. However, because LLCs are subject to double taxation, the profits of the business are taxed both at the corporate and individual owner levels. The cost of this may be very high for LLCs and their owners. Thankfully, there are strategies to prevent double taxes.
A choice to be taxed as a S Corporation (S Corp) is one possibility. Small Business Corporation is indicated by the letter S in S Corp. An S Corp is a type of corporation that is not subject to double taxation but is treated similarly to an LLC. Instead, the S Corp’s gains and losses are distributed to the owners individually and reported on their personal tax returns. Although the S Corp is not required to file an annual tax return, it does have to pay federal income tax on its profits.
An LLC must first satisfy certain qualifying conditions in order to convert to a S Corp. The LLC must have fewer than 100 stockholders, all of whom must be either natural persons or specific kinds of trusts. The LLC must also meet additional particular requirements set by the IRS and be a domestic corporation. The LLC can file Form 2553 with the IRS to elect S Corp status if it satisfies these conditions.
Converting to a C Corporation (C Corp) is another option for an LLC to prevent double taxation. C Corps have the benefit of being able to reinvest their profits into the business without being subject to shareholder-level taxes even though they are subject to double taxation. The company must file articles of incorporation with the state and satisfy other specified conditions in order to convert an LLC to a C Corp, which can be advantageous for businesses that want to keep earnings for future growth and expansion.
Although LLCs have many benefits, this corporate structure also has certain drawbacks. One drawback is that LLCs could find it more difficult to raise financing than other commercial forms, such corporations. This is because corporations can raise money by selling shares, whereas LLCs can only do so by taking out loans or adding new shareholders. Self-employment taxes, which can be more expensive than the taxes paid by employees of a corporation, may also apply to LLCs.
In conclusion, LLCs and their owners may experience a severe financial hardship as a result of double taxation. But there are ways to get around this, such choosing to pay taxes as a S Corp or changing to a C Corp. Business owners should carefully consider the benefits and drawbacks of each option before deciding which is the best course of action for their particular circumstances. They should also speak with a tax expert.
No, a Limited Liability Company (LLC) is not always considered to be a corporation. An LLC is by default categorized as a pass-through entity for taxation purposes, which means that the LLC’s earnings are distributed to its shareholders and only subject to individual taxation. LLCs do, however, have the option to elect to be taxed like corporations if they so want.
An LLC is not an S-Corp, thus no. A flexible company entity, an LLC has the option to select its tax position. An LLC is taxed by default as a pass-through entity, which means that the company’s gains and losses are transferred to the owners’ individual tax returns. To possibly lower its self-employment taxes, an LLC can alternatively choose to be taxed as an S-Corp.