LLCs are a relatively new phenomenon in the U.S. They carry with them several advantages, not the least of which is the way they are taxed. Under certain conditions, however, it may be beneficial for an LLC to be taxed as a C-Corp. This depends primarily on the business as well as how it gets capital.
The IRS will not allow an LLC to be treated as a C-Corp unless its status is changed to a C-Corp, but it can file its taxes as a C-Corp. CPA firms can help to accomplish this filing, but this article will give you some general guidelines.
Taxing an LLC as a C-Corp
A company and its owners can save money on their taxes by filing as a C-Corp instead of as a partnership or a sole proprietorship. A single-owner LLC does this by filing a Schedule C. In the case of a multi-owner LLC, this is done by the business using Form 1065, and each owner filing a Schedule K-1.
There are several conditions under which a firm can be taxed as a corporation, but owners should make sure their CPA is aware of the limitations. It is also essential to understand that this is applicable for tax purposes only.
Reasons to Choose C-Corp Taxation
Many pension funds invest in venture capital. The trouble with an LLC being taxed as a C-Corp is that members of LLCs are employees of the firm, which is not allowed under IRS regulations. If the goal of the LLC is to raise capital funds, it should reform as a C-Corp.
Even an LLC that is taxed as a partnership should be a C-Corp since members are partners in the firm. For this, the partners will receive a K-1, not a W2. Making these changes can take time, depending on how complex the business is.
Owners of a C-Corp don’t have many of the limitations of an LLC that is filing taxes as a C-Corp, but it can be worth the trouble of becoming a C-Corp in certain circumstances. Again, a CPA would be the best resource to help a taxpayer make that determination.
Making Things Simple
The good news in all this is that if the owner(s) of an LLC decide that they want to be taxed as a C-Corp, all that needs to be done is to file a Form 8832. This will allow an LLC to be taxed as a C-Corp. If you are an employee of a C-Corp, the IRS will consider you an employee and an owner. This will allow you to treat any compensation received as a wage instead of a dividend. This keeps the government from taxing the payer twice, as both an employee and an owner.
Any reasonable business owner is always looking for ways to make more money and cut the amount they pay in taxes. If the pros of becoming a C-Corp outweigh the problems involved in changing their business structure (besides the hassles of becoming a C-Corp), it might be worth the trouble to become a C-Corp, if only for tax purposes.
Again, the best person to help you determine whether it is in your best interests to change from being an LLC, as opposed to a C-Corp, is a CPA. Consulting with a CPA costs money, of course, but the advice they give to deal with the intricacies these business structures will be worth the money in both the short and long run. It’s money well spent.