The 5 Biggest Tax Differences Between an LLC and Corporation

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Exploring a business venture is no joke. It requires extremely hard work, dedication, patience, and fund. Aside from that, there are also hard times that’ll test you and your business. At this point, having good and valid decisions must be established. 

Now, among these decisions you’ll make in managing your business starts with your launching, which is the business structure. If not, your business will only fall into being nonsense and a huge loss. Another thing, if you don’t establish a profound business structure, there is a huge possibility that it’ll be structured by default either as a sole proprietorship (sole owner) or a general partnership (multiple owners). At first, you may think of these as simple entities to form but what you don’t know is that there’s a major drawback from behind, which is there’s no such thing as separation between a business owner and his business. 

If your sole proprietorship or partnership business is unable to pay the bills or have been sued, the personal assets you own can be at risk. In this regard, the C Corporation and Limited Liability Company LLC are the most popular business structures that can be utilized. That is because of their capability to minimize the personal liabilities of a business owner with their own vast approaches to taxation. 

Given that, we’re going to clearly discuss the five differences between the taxation process of the corporation and an LLC. With these pointers to be given, you’ll be able to provide a distinction between the two and be able to apply it to your business venture. While these are the greatest starting points, it is best if you consult your trusted tax accountant first to make it compatible with your practical decisions and methodologies in running the business. 

Non pass-through entity vs. pass-through business structure 

By default, a pass-through entity includes an LLC, which is similar to a partnership or sole proprietorship. This only means that whenever there are no payments done by a business for its profits’ income taxes, loss, or any profits are then passed through to the members or owners. Then, there will be a report on their personal tax returns. 

Opposing this, a corporation is called a separate legal entity that must pay its profits’ income taxes and submit a tax return. There are cases wherein this activity leads to double taxation. This is where profits taxes are being gained, and when the owners take these profits, there must be a report of the dividend on their personal tax returns. In terms of small business owners, double taxation is expected to be costly since they accustom the pull out of their business’ profits. 

You need to be reminded that a corporation is eligible or electing an S corporation tax treatment that is treated as the pass-through tax entity just like an LLC. In addition to these, an LLC has the right to choose to be taxed the same way as an S corporation or as a corporation. 

Ability to put and leave money in the company

As double taxation is expected in every C corporation, flexibility when it comes to shifting of income compared to S corporations and LLCs being pass-through entities is promised. Whenever there is taxation in LLCs being a pass-through entity, the members must pay their shares profits’ taxes. This must be done even if the money is retained in the company or has been distributed to the personal accounts. 

Opposing this, owners of C corporations are only taxed on the actual amount of their received dividends. Through closely working with a tax advisor, you can effectively allocate the profits of your business in a way wherein lower income tax brackets are taken advantage of. For example, if the business you own and manage is able to make a yearly profit of $90,000, you can choose if you’ll leave the $50,000 in the corporation as the profit of the corporation and $40,000 only as of the salary. 

Medicare taxes and Social security 

The members of an LLC are not considered employees. Given that, the share of profits they own is not subjected to any Medicare tax or social security. But still, the members of an LLC who works actively in the business must be paid self-employment taxes that include their share of profits and salary on their income. However, being in a corporation means that the salaries are subjected to Medicare taxes and social security. These taxes are not subjected to any distribution of profits. 

So, you need to be reminded that an LLC can be taxed being a corporation. With this situation, only the salary of members is subjected to Medicare and Social security but not profit distribution. 

Ability to deduct loses 

Those members of an LLC who work actively in running the business are capable of deducting the operating losses of the business on their personal tax return. This is the way to offset other incomes. Also, C corporation shareholders aren’t able to deduct any losses, but being an S corporation member can. 

Benefits of the Employees

Talking about the benefits and perks of being an employee, there are several key differences between a corporation and an LLC. First, stock options, employee stock purchase plans, and retirement plans are made available only for C corporations. In addition to that, members of an LLC and even shareholders of an S corporation owning more than the business’ 2 percent must pay the taxes for an employee’s health benefits, insurance benefits, and contributions of the employer to FSAs or HSAs. Another thing, C corporation shareholders are not required to pay the mentioned benefits. 

In terms of choosing the structure, a definite, right, and wise answer does not come at all times. Hard work, patience, and true passion are the needed qualities to keep the business going. So, it is only needed that you think of your financial status, plan retirement age, and other potential sources of benefits as early as now. You need to be more financially literate and clean to enjoy the best of life.