Tax benefits of LLC vs corporation [Definitive Guide]

Last updated : Aug 21, 2022

Is it better to be taxed as a corporation or LLC?

The main advantage of having an LLC taxed as a corporation is that the owner doesn't have to take all of the business income on their personal tax return. They also don't have to pay self-employment tax on their income as an owner of the corporation. The main disadvantage is double taxation.

What is the taxation advantage of a LLC as opposed to a corporation?

LLC Taxation and Fees LLCs avoid the double taxation, which C corporations must pay because they pass all company income through to the tax returns of the individual owners. A C-Corporation (or C-corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.

What is the benefit of an LLC over a corporation?

You may prefer an LLC if you: want a high degree of management flexibility in running your company. want to allocate profits and losses based upon criteria other than ownership percentage. prefer to avoid the state-mandated requirements imposed on corporations, such as annual meetings.

Should my LLC be taxed as an S Corp or C Corp?

If the LLC is a corporation, normal corporate tax rules will apply to the LLC and it should file a Form 1120, U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 or 1040-SR from a C corporation return.

Can LLC Get tax Refund?

Do LLCs get tax refunds? Generally, no. However, LLCs can elect to be treated like C corporations for tax purposes by filing Form 8832. If an LLC elects C corporation status and makes quarterly estimated payments higher than its tax liability for the year, the LLC can receive a tax refund.

What is the benefit of C Corp vs LLC?

In contrast to an LLC, C-corp revenues will be “double taxed,” first at the corporate level and then at the individual shareholder level when distributions are made. Unlike LLCs, C-corps are not able to “pass through” losses or profits to individuals.

Why is an LLC better than a corporation?

LLC owners have greater flexibility in how they run their business. Taxwise, LLCs have more options than corporations. LLCs aren't tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations.

How does an LLC save money on taxes?

LLCs avoid double taxation while enjoying personal liability protection. Unlike a corporation that pays taxes twice on the same profit, first as business income and then again as owner income, LLC shareholders are only taxed once on profits in their personal income.

What are the disadvantages of an LLC?

• Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
• Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.

Why would an LLC elect to be taxed as an S Corp?

The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

Should I file my LLC as an S Corp?

Although being taxed like an S corporation is probably chosen the least often by small business owners, it is an option. For some LLCs and their owners, this can actually provide a tax savings, particularly if the LLC operates an active trade or business and the payroll taxes on the owner or owners is high.

Is it better to be a single-member LLC or S corp?

LLCs offer more flexibility in terms of allocating profit percentages to owners. S corporations offer better options for how profits are distributed. They can be paid as salaries to the owners, or they can be given as profit distributions. S corporations provide more options for tax planning and reduction.

What is the best business structure for a husband and wife?

If Both Spouses Are Owners Your options are: Partnership, with each spouse having a partnership share. Limited Liability Company (LLC), with each spouse having a membership share. Corporation including an S corporation, with each spouse as a shareholder.

What are the 3 types of LLC?

• Single-member LLC for the sole-proprietorship (solo entrepreneur)
• Multi-member LLC (member-managed LLC or manager-member LLC)
• Domestic LLC and Foreign LLC.
• Series LLC.
• L3C Company (low-profit LLC)
• Anonymous LLC.
• Restricted LLC.
• PLLC and LLC.

How can I get the largest tax refund?

1. Know Available Deductions and Your Exemptions.
2. Build Your Retirement Savings.
3. Pay for Medical Expenses With a Flexible Spending Account (FSA)
4. Deduct Medical and Dental Costs.
5. Make Charitable Donations.
6. Consult a Tax Professional.

Can starting a small business help with taxes?

Starting a small business can legally save you thousands of dollars in taxes on you (and your spouses) full-time job incomes. Because businesses can claim tax deductions for housing, utilities, transportation, travel, and computer equipment.

Can a C corp get a tax refund?

If you own a pass-through business and your estimated tax payments and tax withholding exceed the tax due on your return, you can receive a tax refund. Only C corporations pay income taxes directly, so C corporations are the only businesses that can get a refund.

Should I open an LLC or corporation?

Forming an LLC or a corporation will allow you to take advantage of limited personal liability for business obligations. LLCs are favored by small, owner-managed businesses that want flexibility without a lot of corporate formality. Corporations are a good choice for a business that plans to seek outside investment.

Should I start an LLC or S Corp or C Corp?

The LLC is a low-maintenance legal entity that's best for a simple business. An S corporation is a tax status created so that business owners can save money on taxes. A C corporation is a more complicated legal entity that's best for businesses looking to keep profits in the business.

What is the current C Corp tax rate?

A C-corp simply applies the corporate tax rate of 21% to its taxable income.

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hello and welcome to the tax benefits of the LLC what are the tax benefits for the LLC how does the LLC save taxes in this video I'll be answering these all-too-common questions Amanda here you're watching the business finance coach where I simplify business to help you succeed I'm the creator of the small business MBA which guides you step-by-step through starting an LLC or sole proprietor setting up the accounting and taxes and legality so that you have the technical aspects of business in order and you're confident that you're set up right let's get back to the LLC tax benefits there are three main areas that we're going to talk about for the LLC tax benefits but first we have to talk about something the LLC is a legal business type although I know what people are talking about when they say LLC tax benefits they're technically no LLC tax benefits because the LLC is a legal type of business that you form with a state the IRS doesn't even acknowledge the LLC and it has no tax form at all in fact the LLC is called a disregarded entity by the IRS a little bit of history the LLC was created because people were forming corporations and not following the rules and when you don't follow the rules the business doesn't exist just when you need it to such as when you've been sued so the LLC came in to make things simpler and helped out small business owners like you when it comes to taxes let's take a look at my business types cheat sheet from my small business MBA course so here we can see that we have a legal type and a business type every business has two types a legal type first that you form to form the business with a state and the tax type second which is how it's taxed so how an LLC is taxes based on how many members it has members are the owners of an LLC a single-member LLC as it's called with one owner is taxed just like a sole proprietor which is called self-employed that is a tax type of business alternatively a multi-member LLC two or more members is tax as a partnership you can see that there's no direct tax benefit of the LLC every business gets to deduct all of its business expenses now there's another column I have a bigger version of this business types cheat sheet which goes through how the owner is actually paid an owner never actually avoids taxes because of their pay there's no way to set the LLC up in such a way that you get to take all these tax deductions that you would otherwise not get if you didn't catch this loophole and learn about it and set it up and the reason I want to tell you this is because look there are plenty people out there since they realize you want to know about the write-offs they're willing to tell you how you can do things to get write-offs oftentimes people are misled things and depending on that person's level of caring about doing the right thing they may take advantage of you back to the LLC tax benefits when it comes to business types I have another video that I'm gonna link that will be very helpful it's called the legal business types and tax business types I highly recommend watching that as far as our LLC tax benefits number one is that having an LLC requires you to have a separate business bank account and keep the business separate from your person that's why the single-member LLC is called the best of both worlds it's the best of the legal world because you get to have a separate business and it's the best of the tax world because you don't have to have a separate business and instead you can file the business on your personal return the benefits of that is that as a self-employed taxpayer you get to take self-employed write-offs if you work out of a home office if you drive a personally owned vehicle then the self-employed business is going to be the easiest and fastest way for you to get your taxes done and take self-employed tax write-offs you never get to deduct your pay you keep track of what you pay yourself in an LLC because that's your basis in the business think of an investment like your basis in a house or an investment that you purchase it's the same thing with an LLC so the second LLC tax benefit is that your pay is just based on the business net income now as you can see from the bottom of the tax types cheat sheet here the S corp is a special business type that can be elected any separate business type can elect S Corp status and that includes both single member LLC's and multi member LLC's often people are told form the S corp it saves you tax dollars and I'm here to tell you that that's just not generally true let me save you the headache the time and money now I do have another video which will be linked around here where I go over a spreadsheet template that is in my small business MBA course where I allow you to compare your situation as a sole proprietor or partnership compared with the S Corp including things like different expenses for setting up and maintaining the S corp so can the S corp save money it can save money but most of how people think about it saving money is illegal additionally you lose self-employed write-offs when you form the escort because owners of the escort must be paid with a w-2 employee some of the reason why people think that you save so much money with an S corp is because they forget that whatever the business pays is what you're paying to so although it can be like we're saving money because the business gets to deduct this we're not actually saving that much money because the business is you as well and people often don't realize when you're self-employed that you actually get a personal deduction on the form 1040 for some of those taxes you paid and that circumvents so that you don't need to go out and make a separate business it's fair as it is so that is a big part of the misconception but lastly often people will say you can pay yourself ten thousand dollars a year as a w-2 working in an S corp and then the rest you don't have to pay self-employment taxes you can just take a distribution or a dividend that is not true that's breaking the law and is blatantly illegal you need to assess what reasonable salary is for your business which is something that I have more information about as well and again check out that video that goes over the calculation comparison for the S corp versus a self-employed for more information on how that actually works and trust me there are plenty of tax pros out there who are more than willing to set you up in an S corp to save you taxes these rules are complicated I'm not saying that they're bad people they've just misunderstood the rules so that sums up the tax benefits of the LLC primary benefit is that you get the best of both worlds with a single-member LLC meaning you get the separate legal business and not a separate business for taxes alternatively you can elect S Corp status overall there's no loopholes that you're missing out on I'd love to hear your questions comments below this video otherwise do check out the other videos and resources I mentioned everything's linked below this video in the description if you're new here consider subscribing great see you here and otherwise I will se

Thanks for your comment Calandra Pigram, have a nice day.
- Mitch Voelkel, Staff Member

so what's the difference between an s-corp and an llc well first off both of them are actually llc's when we refer to an llc here we're talking about an llc taxed as a sole proprietor we'll just call it an llc and then when we talk about an s corp we're actually referencing an llc tax as an s corporation both llc's and s corps provide business owners with a couple of things legal protection so that they're there's a corporate veil between the company's assets and your personal assets they provide some operational advantages like partnerships and the ability to collaborate with others and they both serve as pass-through entities for taxes which means the profits and losses will flow through to the business owner so let's get a little more specific here for both an llc and an s corp you're going to be figuring out your tax on your net profits now net profit is what's left over after you subtract all your deductions and write-offs from your business's gross income now in an llc your entire net profit will be subject to what's called self-employment tax remember when you were an employee at another company and your paycheck had that little fica or medicare deduction well when you have an employer and an employee relationship your employer would have paid half the social security limit and medicare tax while the employee paid the other half now that you're self-employed you'll get to pay the tax of fifteen point three percent on all net earnings up to the social security limit which changes each year but is at eighteen a hundred and eighteen thousand five hundred for two thousand fifteen after you hit the social security limit all your earnings above that you'll owe medicare taxes which is two point eight percent then after you pay yourself employment tax you'll be subject to state and federal income tax this is simplifying it a bit but essentially you'll be paying an increasingly higher or marginal tax rate on your earnings the more you earn the higher your tax rate so with an llc you'll pay 15.3 self-employment tax on all of your net profits then you'll pay state and federal income taxes on your personal tax return let's look at a quick scenario uh focusing just on the self-employment taxes for a fictitious llc taxed as a sole proprietor here if you had taken in total revenue of whatever then after your deducts deductions and expenses you had a net profit of a hundred thousand dollars your self-employment tax bill would come up to fifteen thousand three hundred so we've got a hundred thousand dollars in net profit and fifteen thousand three hundred dollars in self-employment taxes breaking that down a little bit that's a monthly bill of 1275 dollars just for your self-employment taxes now after you've done your self-employment taxes you'll still owe state and federal income taxes which if you were single and had let's say 85 000 in taxable income just your federal income tax bill would be about 17 thousand three hundred and twenty five dollars on top of your self-employment taxes that's not even factoring in your state income tax property taxes or anything else you pay that seventeen thousand in federal income tax is just for a single person paying on 85 000 in income so this puts your total tax bill excluding fees sales taxes property taxes state income taxes or other dues the total tax bill at a conservative 33 thousand dollars a year that means you're taking home 8 300 a month and writing a check to the government for 2750 a month just for self-employment taxes and federal income taxes if that doesn't get your heart racing a little bit i'm not sure what will so the question is what can we do about this conundrum well the most popular strategy employed is incorporating to an s corp with an s-corp you'll incorporate and become an employee of your corporation then you'll take two forms of income the first part of your income is that you'll pay yourself a salary and the second part of your income is what's called a distribution or a dividend so we're going to split up the income into these two parts the salary and then the distribution what you'll see in a minute is that the salary is subject to the 15.3 self-employment tax while the distribution is not so you're paying 15.3 percent on your salary but not on your distribution because the distribution income isn't subject to that fifteen point three percent tax the temptation can be to falsely shift all your income over to the distribution and not take a reasonable wage which is why the first part of your income or that salary or wage or payroll must be reasonable according to the irs there are multiple factors that dictate what kind of a salary you need to pay yourself the salary needs to be reasonable for your experience comparable salaries economic conditions and a bunch of other factors this is super important you must take a bona fide reasonable salary so now let's take a look at a fictitious s corp example now looking at the same hundred thousand dollars of net profit you'll pay yourself for this illustration a sixty thousand dollar salary then you would take out forty thousand dollars in distributions this is just an example the tax benefit is that the salary is subject to that fifteen point three percent s e tax but the distributions are not subject to the sc tax this means that forty thousand dollars in distributions aren't subject to a fifteen point three percent tax putting your total self-employment tax due down from fifteen thousand three hundred when you were an llc to nine thousand one hundred and eighty as an s corp that's a forty percent decrease rather than paying one thousand two hundred and seventy five dollars a month in se taxes as an llc you'll be paying 765 a month as an s corp that means you've essentially freed up 510 dollars in monthly cash flow in this scenario in a scenario like that 510 dollars a month can easily help you save for retirement pay off your mortgage early hire some help reinvest in your business advertise or invest in real estate sooner now if you've already become an llc and you like the idea of becoming an s corp you have to file for an s election in order to become an s corp before march 15th that's a whole month before april 15th when your taxes are due or you'll have to wait till the next year strategies that utilize an s-corp can give you tools to help mitigate your taxes but these strategies should be handled by a competent cpa or a tax professional here at nuance financial we specialize in helping small businesses from across the country implement these strategies as part of a long-term tax plan so check out the description below and go to nuancefinancial.com we'd love to connect with you and provide a free consultation you

Thanks antolillot your participation is very much appreciated
- Mitch Voelkel

About the author

Mitch Voelkel

I've studied humanG��computer interaction at University of Colorado Denver in Denver and I am an expert in epidemiology. I usually feel dorky. My previous job was computer science professor I held this position for 18 years, I love talking about ultimate frisbee and glass blowing. Huge fan of Matt Ryan I practice alpine skiing and collect fabric and textiles.