Electing C Corporation Tax Treatment for a Single-Member LLC

Learn about the possible benefits of having your single-member LLC taxed as a C corporation.



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The default federal tax status for a single-member limited liability company (SMLLC) is to be a so-calleddisregarded entity. As a disregarded entity, the company itself doesn't pay income tax, but, rather, the responsibility for paying that tax passes through to you personally (this is called  pass-through taxation). However, you do have a choice about how your SMLLC is classified with, and taxed by, the IRS. Instead of the default pass-through taxation status, you can elect to have your SMLLC taxed as one of two types of corporation:

  • a traditional corporation, officially known as a C corporation (and which is commonly just called a corporation); or
  • an S corporation, which is a special type of small, closely-held corporation.

This article briefly reviews the C corporation tax classification. There's a separate article in the  SMLLC section  of this website if you’re interested in S corporation classification.

How to Make the C Corporation Election

You can file an election for corporation tax status at any time after setting up your SMLLC. However, there are limitations on when the election can take effect. Specifically, your corporation tax status must become effective within the 75-day period before the filing date or within 12 months after the filing date. To make the election, complete and file IRS  Form 8832,  Entity Classification Election. The form is fairly simple and mainly involves checking off a few boxes. (In fact, this way of choosing a business’s tax status is officially known as “check-the-box.”)

Your tax situation will be significantly different if you elect to have your SMLLC taxed as a traditional corporation instead of as a disregarded entity. For example, unlike a disregarded entity:

  • a corporation is not subject to pass-through taxation
  • the IRS does not consider the owner of a corporation to be self-employed, and
  • the IRS does not assume all profits are distributed to the owner each year.

Here's a quick look at each of these points.

No Pass-Through Taxation

A corporation is considered a separate entity from its owners (shareholders) and employees, and is not disregarded by the IRS. As a separate entity, a corporation must pay separate taxes each year on its net income. Those taxes are different from taxes you’d pay on your own, personal income: Corporations have their own income tax rates and their own income tax forms.

2014 CORPORATE INCOME TAX RATES

Taxable income over

But not over

Tax rate

$0

$50,000

15%

50,000

75,000

25%

75,000

100,000

34%

100,000

335,000

39%

335,000

1,000,000

34%

1,000,0000

15,000,000

35%

15,000,000

18,333,333

38%

18,333,333

. . . . .

35%

In limited situations, differences between corporate tax rates and personal tax rates for the same amount of income can be used to save on the overall amount of taxes paid by an SMLLC and its owner. This is accomplished through something called split taxation. Split taxation isn’t covered here; if you want to know more, you should contact an accountant or other tax professional.

CAUTION

Lower corporate tax rates do not apply if your SMLLC provides personal services.  Personal services are services in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts. Companies providing these services are subject to a flat 35% corporate tax rate, regardless of the amount of net profit they earn. Consequently, if your SMLLC is providing these kinds of services, it’s less likely that you’ll gain any advantage from electing to be taxed as a corporation.

No Self-Employment Taxes

If your SMLLC is classified as a corporation, then, in contrast to owning an SMLLC classified as a disregarded entity (the default tax classification for SMLLCs), the IRS does not consider you to be self-employed and does not automatically assume you receive all of your company’s profits. (Owners of disregarded entities are taxed on the entire amount of income earned each year by their businesses regardless of whether they take that money for themselves.) Instead, each year you receive from your company whatever amount of money you choose, and you, personally, are taxed only on that amount. (The company is taxed on the remainder, and possibly more.) Moreover, you choose how that money comes to you.

Generally, this means receiving money from the business either as a dividend or as salary. (Other, less common options also exist, such as receiving a bonus over and above a salary or receiving money from the business as a loan.) Dividends are taxed differently from salaries, and both methods of receiving money are taxed differently than money from self-employment.

More specifically, a dividend is not a deductible business expense. Therefore, both your SMLLC and you, personally, have to pay taxes on dividend money. In other words, dividend money is subject to  double taxation. In contrast to a dividend, a corporation can deduct as a business expense any salary it pays to an employee. Because dividend money is taxed twice but a salary is only taxed once, most SMLLC owners who choose to have their businesses taxed as corporations receive their money as a salary.

Be aware, however, that if you treat yourself as an employee and pay yourself a salary, your SMLLC must follow the same tax rules as any other employer. This includes withholding the required employer taxes, depositing the withheld money in a separate account, and ultimately paying that money to the federal government. It also includes filing a quarterly employer tax return (Form 941) with a quarterly tax payment (this can be done either by mail or electronically using an e-file system).

Example:  Charlie’s SMLLC manufactures and sells shipping boxes. Charlie has elected to have the company taxed as a C corporation. For the most recent tax year, the business had $90,000 in net profits before subtracting any money Charlie would take for himself. Charlie wanted $60,000 of the money for himself, but didn’t want to pay double taxes on it. So, rather than taking it as a dividend, Charlie paid himself a monthly salary of $5,000. Each month, he made sure to calculate how much his company had to withhold for Social Security, Medicare, and federal income tax, and he put that money in a separate account. Each quarter, he sent the withheld money to the IRS electronically using the Form 941 e-file system. Also, on a quarterly basis, his SMLLC made estimated tax payments using  Form 1120-W. At tax time, the company filed a separate tax return to pay taxes, at corporate tax rates, on the $30,000 of profit remaining after Charlie’s payments to himself. Charlie also reported and paid taxes on the $60,000 annual salary he received on his personal Form 1040.

You can find additional information on how SMLLCs are taxed in other articles in the  SMLLC section  of Nolo's website. Many elements of paying corporation taxes, as well as paying yourself from an SMLLC taxed as a C corporation, can be tricky. For answers to detailed questions, check  irs.gov  or consult with a tax professio

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