Choosing Between an LLC and a Corporation
Selecting the right entity defines how your business is taxed and operated for years to come. Here’s the core distinction we walk clients through.An LLC is treated as a pass-through entity. Neither the federal nor state government taxes the LLC’s net income directly. Instead, that income passes through to the owners, who report and pay taxes on their share on their personal returns, regardless of whether the LLC actually distributes that money to them. The advantage is that once that income is taxed, money the LLC later sends to its owners isn’t taxed again. LLCs are also generally more flexible, with fewer required corporate formalities, and can elect to be taxed as a partnership, S-corporation, or C-corporation.A corporation is not a pass-through entity. The federal government taxes the corporation’s net income directly, at a 21 percent rate. Shareholders don’t pay tax on that income directly, but when the corporation distributes it to them as dividends, they pay tax again at their individual rate. This is double taxation, and it’s the main reason most people avoid corporations, unless the plan is to reinvest profits rather than distribute them, or unless the business is trying to raise money from investors, where a corporate structure is often viewed more favorably.We’ll help you think through this decision, then manage the execution as efficiently as possible.
