Attorney Thomas B. Burton answers the following question: Who Pays More Taxes an LLC or C Corporation?
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Transcript of Video: Who Pays More Taxes - an LLC or a C corporation?
"Who pays more taxes - an LLC or a C corporation?"
Hello, I'm Attorney Thomas Burton and that's today's Question!
In general, a C corporation is going to pay more taxes than an LLC because the distributions are taxed at both the corporate and the shareholder level. When you think about a C corporation, they owe corporate tax up at the entity level. Then they issue what's called dividends to the shareholders and shareholders report and pay tax on their dividend income.
This is what's called sometimes Double Taxation at the corporate level.
In contrast, an LLC by default, is a flow through entity meaning all income and expenses, income, profits or losses of the business flows through to the owner on their individual tax return. Individual owner then pays taxes at their individual tax rate.
In most cases, flow through taxation is therefore less taxation for someone for an example, let's say whether a single member LLC where one person owns the entire business of the LLC or they own 100% of the shares of C corporation, the only question is which one to be.
That's why so many small businesses often use the LLC, take advantage of what's called flow through taxation, in order to avoid that Double Taxation, the first tax at the corporate level, none attacks again at the dividend level.
Now of course, there can be other reasons why you might want to C corporations such as you want to issue shares, take on outside investors things like that but for small businesses, where you plan to remain family owned like a Lawn Care Business, a Painting Business, an Auto Repair Shop, often you don't want to pay that double taxation corporate level and then pay it again pay yourself a dividend from the corporation.
Before we had LLC's, that was the main option if you wanted to get limited liability protection, for your business, you would form that C corporation and then deal with the taxes.
But in Wisconsin, in recent years the LLC has quickly become the most popular type of business entity filed every year and in my opinion, a primary reason for this is the ability for individuals to form an LLC and gain the limited liability protection of a corporation but still maintain flow through taxation similar to a sole proprietorship where the profits or losses of the business are reported on the owner's individual income tax return.
And relatively easy to maintain unlike a C corporation which requires issuing shares, keeping meeting minutes, adopting corporate bylaws, having an annual shareholder meeting.
An LLC does not have all of those corporate formality requirements. It has some but much less than a C corporation.
So who pays more taxes, LLC or C corporation, the real answer is it depends but in general a C corporation is likely to pay more because you have that double taxation at both the corporate level paying corporate tax and then taxed again at the dividend level when money is distributed to the shareholders.
Great question and thank you for asking. Thank you for tuning in and we'll see you next time!
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