One of the features of an LLC that distinguishes it from a corporation is the way it’s taxed. Corporations pay a corporate tax based on their profit in a given year, and the shareholders pay separate taxes on money that the corporation pays them, either through dividends or a salary.
An LLC, by contrast, is called a “pass-through entity,” meaning that the LLC itself isn’t taxed as a separate entity. Rather, the members are taxed on the company’s profits in line with their respective percentages of ownership. For example, if you own 60% of the equity in your LLC, and your partner owns 40%, you would be responsible for 60% of tax on the company’s profits (and would be entitled to 60% of the deductions resulting from a loss).
This tax structure is often beneficial for early-stage companies, since it’s less complicated than taxation on a corporation. However, for a number of reasons, you may want to have the flexibility of an LLC while paying tax as if your entity is a corporation.
The good news is that you can elect to have your LLC taxed as a c-corporation. This means that, although your company will maintain the legal structure of a limited liability company, it will pay an entity-level tax and the members will pay a separate tax on any money they are paid individually. The process for forming the LLC is typically the same; once the company has been created, you can elect corporate tax status by filing Form 8832 with the IRS.
Alternatively, you may want your LLC to be taxed as an S-corporation. While an S-corp tax structure is more similar to an LLC, given that they are both pass-through structures, an S-corporation offers certain advantages that you may not get with an LLC. The good news is that you can elect to have your LLC taxed as an s-corporation by filing Form 2553 with the IRS.
So if you’re stuck between a corporation and an LLC, you may be able to have your cake and eat it too. Speak with an attorney and accountant to determine which structure, or combination, is best for your business.