LLC or Limited Liability Company is currently one of the most common and popular business forms in the US.
LLCs combine the benefits of a corporation and sole proprietorship or partnership. While this hybrid structure is one of the most significant advantages of LLCs, the structure is also confusing for new entrepreneurs.
A lot of entrepreneurs wanting to register themselves as LLCs generally have several queries with regards to the business structure.
One of the most common queries is whether an LLC is a corporation or gets the corporate treatment for tax purposes.
If you are looking for a straightforward answer to this question, you should surely read this post in its entirety.
What is an LLC?
LLC or Limited Liability Company is a type of private limited company. It is one of the simplest business structures after sole proprietorship. LLC structure offers many benefits generally available with the corporation and sole proprietorship or partnership.
If the business has a single owner, the LLC can be a Single Member LLC. If there are two or more owners, it is a Multi-Member LLC. The LLC business structure is popularly known as a pass-through business structure. This means that all the profits and losses of the LLC will pass through the personal income tax of the owner/s.
With LLC, the owner gets limited personal asset protection. This helps in protecting their personal assets if someone files a lawsuit against the LLC. Such protection is not available with a sole proprietorship.
What is a Corporation?
The corporation is a more complex business structure as compared to LLCs. Unlike LLCs, the profits and losses of the corporation do not pass through the business owner. A corporation is a separate legal entity, and its taxation is separate from the owner.
For creating a corporation, you have to file organization forms and assign shareholders. To oversee the operations of your business, you will also require the Board of Directors. Just like LLCs, the corporation also offers limited personal asset protection.
LLC as a Corporation
A Single Member LLC gets the option to select between a disregarded entity or a corporation for tax purposes. In case if you choose disregarded entity, your LLCs tax treatment will be similar to that of a sole proprietorship. Similarly, a Multi-Member LLC can be a partnership or a corporation for tax purposes.
So, it is possible for an LLC to be considered a corporation. But for this, the owner/s of the LLC have to elect the corporation structure for tax purposes.
When Do LLCs Elect to Be Treated as a Corporation?
Corporations are subject to double taxation. It means that the business dividends are taxable and the owner/s is also required to pay personal income tax. It is a significant reason why LLC owners prefer to be treated as disregarded entities.
However, the corporate structure proves to be more beneficial to some LLC owners in case they have high taxable income. But only switch to corporate tax structure if the tax savings will be higher even after considering double taxation.
There are also some other reasons why an LLC can consider the corporate tax structure. Some common reasons are-
- Owners are looking for venture capital
- Owners have plans to sell the business in future
- Owners want more flexible profit sharing
- Companies want to offer employee benefits and health insurance to the employees
- Owners want to grow the business further through the profit the business generates
- Owners wish to have a more organized management structure
- Owners want to offer the stock option to the employees
S Corporation and C Corporation
LLCs that want to be a corporation for tax purposes again have two choices- S corporation and C corporation. When an LLC applies to incorporate, C corporation is the default formation. However, if all the shareholders of the corporation agree to file as S corporation, the C corporation can become an S corporation.
A lot of LLCs go with the S corporation tax status to make the business income pass through their personal tax returns. This means that S corporation tax structure can be used for avoiding double taxation.
All the business income will pass through the individual tax returns of the owners, eliminating the requirement for filing a corporate tax return.
Most LLCs generally stick to the LLC structure due to the benefits it offers. But in some cases, the corporate structure can prove more beneficial for some LLCs.
So, yes, an LLC can be a corporation for tax purposes. However, LLCs do not get the corporate tax structure by default. They need to elect the structure after considering the benefits and drawbacks with respect to their business.
Even with the corporate structure, an LLC has to select between S corp and C corp after thoroughly understanding the structures. As this decision is a complex one, LLCs wanting to switch to the corporate tax structure, generally rely on professional legal help.