How does taxation differ between Corporations and LLCs?
A C corp is subject to what is known as double taxation. It pays corporate taxes on its own net income, and then that money can be taxed again, generally as dividends, under personal tax rates. This differs from sole proprietorships or general partnerships, pass-through entities that only pay personal tax rates. Pass-through entities are not taxed on their net income, but instead pass their net income or loss directly through to the business owner(s), who pay income tax on their share of the business net profits regardless of whether they ever take profit distributions from the business.
An LLC is unique in that it can be taxed as a pass-through entity, C corp, or an S corp. Unless an LLC elects corporate tax classification by filing Form 8832 (C corp) or Form 2553 (S corp) with the IRS when it is formed, a single member or owner LLC is taxed as a disregarded entity and a multiple member or owner LLC is taxed as a partnership. In this scenario, they will only be subject to personal taxes, not corporate taxes.
There is no one business entity structure that will routinely produce the lowest overall tax burden for a business and its owners. A business’s tax burden varies depending on a number of factors, including the expected business net profit, the owners’ personal income tax situations and the ever-changing tax laws.