If you are looking for a way to protect your company from personal liability, then forming a C corporation LLC may be the best option.
There are many benefits associated with forming a C corporation LLC, but there are also some disadvantages.
After comprehensive research, our team of legal experts and business professionals will provide you with detailed instruction on how to file a tax as a C corporation LLC, as well as its benefits and implications.
- Filing taxes as an LLC C corporation entails normal corporate tax rules. All members are required to sign a document to make the registration official.
- Members are not personally liable for debts incurred by the LLC C corp.
- It is subjected to double taxation. However, the entity can opt to pay salaries rather than dividends, consider loaning from the business, and set a portion of the income to retained earnings to lessen tax obligations.
What is a C corporation LLC?
A limited liability company (LLC) represents 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.
C corporation status carries the benefits of limited liability that LLCs offer, so if LLCs elect to be taxed as a corporation, 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, the election must be made.
In other words, you will still have an LLC, but the way the LLC files taxes will be dictated by the elected taxation method, whether it be C or S corporation, partnership, or sole proprietorship.
Why choose C corp taxation for your LLC?
You should choose a C corp taxation for your LLC because taxes paid at a corporate level offer certain tax advantages which are not applicable in other businesses can't have.
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 pass-through taxation
- C corp taxation: C corps pay taxes on their income and then distribute dividends to shareholders
- S corp taxation: similar to C corps, but with restrictions on who can be a shareholder.
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 corporation by filing an Entity Classification Election (Form 8832) with the Internal Revenue Service.
This allows limited liability companies to avoid double taxation.
Instead of being taxed as a partnership, an LLC taxed as a C corporation 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 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.
In the United States, if a company is taxed as a corporation, 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, there is no paying tax directly on your pay; 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 corporation 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.
Lower tax rates
An LLC and its members may benefit from corporate tax rates because the personal income taxes at the higher end of the spectrum are greater than corporate taxes.
Because an LLC and its members may save money by choosing C corporation taxation, they may realize a net income tax reduction.
Paying salaries (taxable at personal rates) out of part of the LLC profits rather than via distributions (not taxable until distributed) may reduce the amount of tax on business income.
Taxes are levied against both corporations and their shareholders, but certain business expenses can be used to offset this taxation at all levels.
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.
C Corp LLC Disadvantages
C corp LLC disadvantages include the following:
- C corporation status doesn't automatically guarantee to avoid double taxation. Dividends may be taxed twice if the company is a C corporation 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.
One way to avoid it is to retain earnings rather than pay dividends. 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.
How to file for C corp LLC?
To file for a C corp LLC, consider the requirements and procedures. 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.
- Declare the status and legal structure of the business.
- Your LLC should have more than one member to file for C corp status, and all members need to sign form 8832 to make the election official.
- Provide your LLC name, principal address and the date the LLC was formed.
- You will need to submit the employer identification number for the registration, which you can apply for via the IRS when filling out the 8832 form.
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 Does C In C-Corp Stand For?
The "C" in C corp stands for subchapter C and is under the Internal Revenue Code. It signifies the taxation status of a business.
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 taxes.
Does A Corporation File An Income Tax Return?
Yes, a corporation is required to file and income tax return - Form 1120.
C corporation shareholders have to file a personal tax return on the dividends depending on the tax election.
How Do I Report Income From C Corp?
C corps don't report income, but the corporate entity does.
Members report their share of income, deductions, and credits on their tax returns, just like a partnership.
Do C Corp Owners Have to Take A Salary?
The owners of C corps don't have to take a salary and so avoid payroll taxes.
Owners who want to draw out earnings from the company can do so through dividends or selling their stock shares.
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.
This lets you decide how you distribute profits, either as a dividend or an employee wage.
Can A C Corp Own An LLC?
State corporation laws and LLC laws allow a C corp to own an LLC. The structure and accounting records should be separate between the two entities because taxation differs between a C corporation and an LLC.
Can A C Corp Own An S Corp?
A C corp cannot be owned by an S corp due to its taxation status. However, an S corporation can be a shareholder in a C corporation.
How Do I Know If My LLC Is C Or S?
To know whether your LLC is under C or S corporate designation, the Internal Revenue Service can provide information about your entity type.
As of 2019, this information is also available online in the IRS's free "fill-in forms" program called Free File Fillable Forms.
You can also call their helpline at (800) 829-4933 and ask for this information.
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.
Who Is The Board Of Directors Of A Corporation?
The board of directors of a corporation comprises individuals elected by the shareholders to make important decisions on their behalf and hold annual meetings.
Directors must act following state and federal laws and organizational documents such as articles of incorporation, articles of organization, and the company’s bylaws.
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.
LLC Filing As A C Corp
C corporation LLCs offer many benefits, but they also have some drawbacks. It depends on your business needs whether you will choose this type of taxation.
If you are considering changing from an S corp or partnership to a C corp, consult with a professional and seek legal advice before making any decisions that could have long-lasting consequences for your company.
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