What is the difference between an LLC and S Corp?
An LLC is a type of business entity, while an S corporation is a tax classification. It lets the Internal Revenue Service (IRS) know that your business should be taxed as a partnership. To become an S-corporation, your business first must register as a C corporation or an LLC.
Do you get double taxed as an LLC?
The LLC is not a separate taxpayer, and it does not pay dividends. Thus, the double taxation concept does not apply to LLCs (unless, of course, an LLC elected to be treated as corporation for federal income tax purposes, which would be a rare occurrence.)
What is double taxation and how does it affect corporations?
Double taxation refers to how income earned by C corps is taxed twice: once when the corporation earns income, and again when it distributes dividends to its owners (who then pay taxes on those dividends). S corps avoid double taxation by passing their income through to their owners directly.
What are the pros and cons of forming a corporation?
Both have their advantages and disadvantage. Creating a corporation might prevent you from personal liability, while not incorporating might protect you from double taxation. Because of the impact on your business and personal life, it’s important to weigh the pros and cons of forming a corporation.
What are the tax implications of a traditional corporation?
A traditional corporation’s profits are subject to double taxation, meaning the corporation is taxed on its earnings. Shareholders who earned profits as dividends or capital gains are also taxed. This is usually only found in large businesses. Small businesses can avoid this by choosing an “S” Corporation status.
Are partnerships separate from their owners for tax purposes?
Generally, the IRS does not consider partnerships to be separate from their owners for tax purposes; instead, they are considered “pass-through” tax entities.