Is an LLC taxed the same as a C Corporation
The U.S. Internal Revenue Service (IRS) classifies the two most common types of business entities as C Corporations and LLCs. While both are pass-through entities, meaning that they don't pay taxes at the entity level, there are some key differences between how a C Corporation and an LLC are taxed.
A C Corporation is Taxed Separately
A C Corporation is taxed separately from its shareholders. This means that the corporation is taxed on its profits, and the shareholders are only taxed on dividends they receive from the corporation.
If a C Corporation has a net loss for the year, this can be offset by taxes that have already been paid by either the shareholder or another entity owned by them. So if your business had $1 million in revenue and $500k in expenses, but you received good news that you've been awarded a contract worth $1 million dollars—you could still claim all of your expenses against this new income.
Tax Status of an LLC
At the entity level an LLC does not pay taxes. Instead, it passes its profits and losses through to its owners. The owners report their share of the profits and losses on their personal income tax returns.
Tax laws for an LLC
The tax treatment of an LLC depends on the number and type of owners, which can be a single person or multiple people.
A single-member LLC is not subject to taxes because it does not have any separate legal existence from its owner.
A multi-member LLC is treated as a partnership for tax purposes, unless you file IRS Form 8832 to elect to be taxed as a corporation. In this case, you'll pay corporate income taxes on your net profit (after all expenses).
There are differences in how a C Corporation and an LLC are taxed. You should know what they are before making a decision about what type of business entity to form.
I hope that this information was helpful. If you have further questions about the taxation of LLCs, feel free to contact us at our office or online.