LLC Filing Taxes as a C Corp (All You Need to Know)
An LLC has the option to be taxed as a C Corp by applying for the tax status with the IRS. Certain legal requirements and procedures have to be completed.
After comprehensive research, our team of legal experts and business professionals with over a decade of practice provides you with detailed instructions on how to file a tax as a C corporation LLC, as well as its benefits and implications.
Quick Summary
- Converting an LLC to an LLC C Corporation involves adhering to corporate tax rules, signing form 8832, and enjoying limited liability for members.
- LLC C Corporations are subject to double taxation but can mitigate tax obligations by opting for salaries, loans from the business, and retaining a portion of income.
- According to the IRS, approximately 20% of LLCs opt to change their tax status to or from C corporation status during their lifecycle.
- I usually emphasize that C corps involve more regulations and costs but choosing C Corp taxation offers advantages like avoiding double taxation, simplifying employee taxes, and potentially benefiting from lower tax rates.
Business Entity Options
When starting a business, one of the most important decisions you’ll make is choosing the right business entity.
The type of entity you choose will affect your business’s tax obligations, liability protection, and overall structure.
Here are the main business entity options available:
- Sole Proprietorship: This is the simplest form of business entity, where the business is owned and operated by a single individual. For federal income tax purposes, the business income is reported on the owner’s personal tax return, making it a disregarded entity. However, sole proprietorships do not offer liability protection, meaning the owner’s personal assets are at risk if the business incurs debt or is sued.
- Partnership: A partnership involves two or more individuals who share ownership of the business. Similar to sole proprietorships, partnerships are pass-through entities for income tax purposes, meaning the business income is reported on the partners’ personal tax returns. Partnerships also do not offer liability protection.
- Limited Liability Company (LLC): An LLC combines the liability protection of a corporation with the tax benefits of a partnership. LLCs can choose their tax treatment, including being taxed as a C corporation, which involves filing Form 8832. This flexibility makes LLCs a popular choice for many business owners.
- S Corporation: An S corporation offers liability protection and pass-through taxation, meaning the business income is reported on the shareholders’ personal tax returns. However, S corporations have restrictions on ownership, such as a limit of 100 shareholders and the requirement that all shareholders be U.S. citizens or residents.
- C Corporation: A C corporation is a separate legal entity that offers liability protection and is subject to corporate income tax. C corporations can have an unlimited number of shareholders and can raise capital more easily than other business entities. However, they are subject to double taxation, where the corporation pays taxes on its profits, and shareholders pay taxes on dividends received.
How to file Taxes for C Corp LLC?
To file taxes for C Corp LLC, you should submit all pertinent requirements. C corporation tax status can be elected upon registering, but you can also change it down the line if you get a tax advisor involved.
When making a C corporation tax election, it is important to select an effective date for the election and consult with an accountant to ensure compliance.
To elect C corporation tax treatment for an LLC, you must select the specific checkbox on the relevant form.
According to the IRS, approximately 20% of LLCs opt to change their tax status to or from C corporation status during their lifecycle.
To file for a C Corp LLC, the requirements include:
- Provide the LLC name, principal address, and formation date
- The LLC should have more than one member
- File form 8832 signed by all members
- Submit a consent statement signed by all members or legal representative
- Provide an Employer Identification Number (EIN) from the IRS
Note: With this number, your business is exposed to fewer potential risks as it will provide a unique identifier that identifies your LLC across all states in which it plans to conduct business.
What Is a C Corporation LLC?
A C Corporation LLC is a business structure that offers tax benefits but protects business owners from personal liability.
S and C corporations are not business structures. They are taxation formations that companies can opt for when they register their business.
Business entities can be a C corp and LLC at the same time.
Based on our experience, C corporation status carries the benefits of limited liability that LLCs offer, so if LLCs elect to be taxed as a C corp, they will have limited liability protection while allowing it to pay taxes on corporate income at a lower rate.
When filing Form 8832 with the Internal Revenue Service as per the Internal Revenue Code, the election must be made [1]. According to IRS data, each year, around 10% of eligible entities make this election to change their tax classification.
In other words, you will still have a limited liability company, but the way the LLC files taxes will be dictated by the elected taxation method, whether it be a C or S corporation, partnership, or sole proprietorship.
Corporate losses can only offset taxable income on corporate tax returns.
Why Choose C corp Taxation for Your LLC?
We recommend choosing a C corp taxation for your LLC because taxes paid at a corporate level offer certain tax advantages that are not applicable in other businesses.
Corporation tax treatment can be particularly beneficial for companies aiming to raise substantial capital or go.
The tax benefits can be accomplished through either an LLC or a corporation, but you'll want to know the difference before making your decision:
- A pass-through entity (LLC) passes its income on to owners who report business profits and losses on their tax returns through LLC pass-through taxation. LLC owners may be eligible for a qualified business income deduction of up to 20% on their business income.
- C corp taxation: C corps pay taxes on their income and then distribute dividends to shareholders.
- S corporation taxation: similar to C corps, but with restrictions on who can be a shareholder.
The main advantages of choosing a C corp taxation include the following:
1. Double Taxation Avoidance
Although an LLC cannot benefit from the protections of a corporation for state business entity statutes, it can choose to be taxed as a C corp by filing an Entity Classification Election (Form 8832) with the Internal Revenue Service.
This allows limited liability companies to avoid double taxes.
From our experience running several LLCs, instead of being taxed as a partnership, an LLC taxed as a C corp is treated as a corporation for tax purposes.
The entity itself is the taxpayer, and corporate tax rates take precedence over individual rates without the double tax.
The members' only personal income taxes are levied on the salary and shareholder dividends received by the LLC as compensation and dividends if it has chosen C corp taxation.
2. Employee Taxes
In the United States, if a company is taxed as a C corp, it can typically issue W-2 forms to employees before its partnerships can receive their Schedule K-1s because corporations do not have to wait until they complete their corporate taxes to release W-2s.
As a W-2 employee, you need not pay self-employment taxes directly on your salary; each time the LLC pays out salaries, it withholds and then pays federal, state, and local taxes.
Unlike partnerships with limited deduction amounts on medical, education, life, and child insurance, a C corp is a separate legal entity from its owner-employees.
The LLC's owners have greater flexibility in that sense. C Corp LLC can often pay for these perks on its employees without facing the same restrictions as those applied to partnerships.
3. Lower Tax Rates
Based on our first-hand experience, choosing C corporation taxation for an LLC can lead to potential tax benefits, as corporate tax rates at the higher end may be lower than individual rates.
This choice may result in a net income tax reduction for both the LLC and its members, especially when paying salaries (taxable at personal rates) instead of distributions.
Additionally, businesses can utilize specific expenses to offset taxation, benefiting both the corporation and its shareholders.
A corporation's profits that remain after paying taxes are called its "corporate surplus" or "profit."
The availability of these LLC tax deductions and credits makes it more likely that corporation shareholders of the LLC will pay fewer taxes than they would as partners of a partnership.
"Depending on your business's specific needs and capital-raising goals, opting for an LLC taxed as a C-corp could prove advantageous. While your LLC retains its structure, electing corporate taxation status offers certain strategic benefits."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
C Corp LLC Disadvantages
C Corp LLC's disadvantages include the following:
- C corporation status doesn't automatically guarantee to avoid double taxes. Dividends may be taxed twice if the company is a C corp and pays taxes once.
- Salaries are taxed at the individual rate but are deductible costs for the company. The IRS requires that salaries be justifiable, although this is not always true.
- C corporation tax structure must adhere to more stringent criteria and regulations, which means they are subject to higher costs and paperwork.
- The formation of a C corporation may cost thousands of dollars and continuous fees for keeping the firm, depending on the corporate structure.
When dividends paid to shareholders are taxed at the shareholder's rates, this is known as double taxation.
We recommend retaining earnings rather than paying dividends to avoid it. This way, the company's earnings are taxed only once and at a lower rate, as previous losses and depreciation deductions can offset them.
Another way is to opt for an S corporation status. Since income or loss passes through to shareholders' returns, no double taxation occurs with S corporations because they are pass-through entities.
Shareholders are not paid dividends. Shareholders who work for the business may be compensated higher salaries than dividends.
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Choosing a Business Entity
Choosing the right business entity for your business can be a complex decision. It’s essential to consider your business’s specific needs, goals, and circumstances when making this decision.
Here are some factors to consider when choosing a business entity:
- Taxation: Different business entities have different tax implications. For example, sole proprietorships and single-member LLCs are considered “disregarded entities” for federal income tax purposes, meaning the business income is reported on the owner’s personal tax return. On the other hand, C corporations are taxed on their profits at the corporate level, and then the shareholders are taxed again on the dividends they receive.
- Liability protection: LLCs and corporations offer liability protection for their owners, which means their personal assets are protected in case the business is sued or incurs debt. Sole proprietorships and partnerships do not offer this level of protection.
- Ownership structure: The ownership structure of your business will also impact your choice of entity. For example, S corporations are limited to 100 shareholders, while C corporations can have an unlimited number of shareholders.
- Self-employment tax: If you’re a sole proprietor or single-member LLC, you’ll be subject to self-employment tax on your business income. However, if you’re a C corporation, you’ll only be taxed on the salary you receive from the business, not on the business profits.
- Business expenses: The type of entity you choose will also impact how you deduct business expenses on your tax return. For example, C corporations can deduct business expenses on their corporate tax return, while sole proprietorships and single-member LLCs report business expenses on their personal tax return.
Ultimately, the best business entity for your business will depend on your specific circumstances and goals. It’s essential to consult with a tax professional or attorney to determine the best entity for your business.
FAQs
Are C Corporations Considered Self-Employed?
C corporations are not considered self-employed. The company is subject to corporate income tax while members are required to pay personal income tax.
Can You Have A Single-Member C Corp?
You can have a single-member C corp. When your single-member LLC is taxed as a C corporation, you are its only employee and the majority shareholder, but you need not pay self-employment tax.
This lets you decide how you distribute profits, either as a dividend or an employee wage. As a default, your LLC is treated as a disregarded entity.
How Much Does It Cost To Switch From LLC To C Corp?
It costs between $100 to $1000 to switch from LLC to C Corp. It mainly depends on state laws and previous tax records.
Do C Corporations Need A Business License?
Yes, C corporations need a business license to operate. The type of business structure determines the process to obtain a business license, as well as any fees and other requirements attached to that particular business license.
References:
- https://www.irs.gov/businesses/small-businesses-self-employed/llc-filin-as-a-corporation-or-partnership
