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.
The first thing you should know about this type of business entity is that it protects your assets from being seized in case of any legal action.
Many business owners, celebrities, and other high-profile individuals have used this type of entity to protect their assets when starting or expanding their business.
There are many benefits associated with forming a C corporation LLC, but there are also some disadvantages.
We will discuss both sides of C corps and their tax implications in detail in this blog post so make sure to read on.
What is a C corporation LLC?
A limited liability company (LLC) represents a business structure that offers tax benefits but protects the business owners from personal liability.
A corporation is another legal entity that separates your company's finances and taxes from its owner's affairs.
Limited liability companies are popular choices for startup businesses because they are inexpensive to form and maintain.
They also offer a lot of flexibility because they can choose how they want to be treated for tax purposes: as sole proprietorships (single-member LLCs), partnerships (multi-member LLCs, or corporations (C or S corporations). Remember that you can choose only one class for one business entity.
On the other hand, 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?
Taxes paid at a corporate level offer certain tax advantages 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 is 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 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.
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.
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.
How to file for C corp LLC?
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.
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.
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.
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.
You will also need to provide your LLC name and principal address.
The next piece of information you need to provide is whether you are changing your legal structure from a partnership or other entity or forming an LLC corporation from scratch.
You will also need to provide the date your LLC was organized or formed.
For your C corp election to be valid, the consent statement needs to be signed by all the members of your LLC and the entity's legal representative.
What Does C in C-Corp Stand For?
The "C" in C corp is supposed to signify the subchapter C under which these types of corporations are taxed.
Are C Corporations Considered Self-Employed?
Suppose you're a C corporation and your business earnings $500,000 in one year.
In that case, you'll pay tax on taxable income, i.e., the company's revenue, and then personal income tax on any wages you pay yourself.
Because you are an employee rather than a self-employed individual, you do not have to pay self-employment tax.
Does a Corporation File an Income Tax Return?
Yes. A corporation is required to file Form 1120, U.S Corporation Income Tax Return.
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?
Not necessarily. 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?
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.
Unlike a dividend, a corporation can deduct any salary it pays to an employee as a business expense.
Can a C Corp Own an LLC?
Yes, but there are some things to keep in mind. For example, suppose a corporation wants to own an LLC. In that case, it should keep its structure separate from the LLC if a single-member C corp with an LLC is liable for self-employment taxes when its company draws out income as dividends or salaries.
Keeping the accounting records separate between these two entities is also crucial because they have tax purposes.
Can a C Corp Own an S Corp?
Unlike C corps, which are allowed to have an unlimited number of corporation owners (shareholders), S corps can't be owned by other entities, including partnerships, LLCs, and C corporations.
How Do I Know if My LLC Is C or S?
The Internal Revenue Service can provide information about your entity type. An LLC can be taxed as a C corporation or an S corporation, but not both.
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 depends on several factors, but mainly on the state where you're operating and the previous tax record at hand.
The fees range anywhere from $100 to $1000 or more, depending on your state and how complicated it is for you to switch over.
Who Is the Board of Directors of a Corporation?
The board of directors 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. A business license is required for all businesses, including C corporations.
The type of entity you are 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: Conclusion
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.