LLC Vs. Corporate Taxes
LLCs and corporations are two common forms of business structure that small-business owners can consider as they are creating or growing their companies. LLC stands for limited liability company, a very flexible type of business structure that allows you to adjust executive positions within the company as needed and pass liability onto the business without threatening personal assets. Corporations, especially the S corporation, which is more popular for small businesses, are not as flexible but have different tax rules that may benefit the organization.
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LLCs
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One of the major tax benefits of an LLC is the associated tax benefits that come when owners file income taxes. In an LLC, the profits made by the business are considered profits that the owners make directly. This means that the Internal Revenue Service requires the profits to be taxed only once, as they pass into the hands of the owners. If only one person owns the LLC, he can file as a sole proprietorship, which makes creating tax returns much easier for the business and simplifies deductions.
S Corporation
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A S corporation has some of the same benefits associated with an LLC, but also has a much more rigid structure. It also has pass-through taxation, so the IRS taxes the profits only once as the business owners earn them and report them on their personal tax returns. However, income must be distributed according to investment and position. In an LLC, owners can agree to divide earnings as they see fit, but in an S corp earnings must equal investments, so an owner who works for the company 70 percent of the time but invested only 10 percent of the capital can earn only 10 percent of the income.
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Employment Taxes
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The IRS requires employment taxes to be paid by owners of LLCs and S corps, since they are considered self-employed. This tax takes the place of the normal tax for Social Security and Medicare. In an LLC, all profits made by the business are subject to this tax automatically. In an S corp, the rules are slightly different. Only the salary specifically set aside for the owners is subject to employment tax. Distributions from the business that come from extra earnings are not taxed, but the amount of paperwork is greatly increased.
C Corporation
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A C corporation is a large corporation that creates an initial public offering of stock and is very different from both LLCs and S corps. A C corp is its own entity, from a legal standpoint, which insulates all owners (including the new investors) from liability for business actions. However, pass-through taxation does not apply, so all earnings are taxed twice. First, the business entity is taxed, then all owners and employees who receive profit from the business are taxed as well.
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