Frequently Asked Questions
What are the conditions under which an LLC can elect C- or S-corporation taxation?
An LLC, or Limited Liability Company, is a type of business structure that offers flexibility in management and pass-through taxation, meaning the income and loss pass through to your personal tax return. However, an LLC can elect to be taxed as a C- or S-corporation under certain conditions. A C corporation is taxed on its profits, and shareholders also pay personal tax on the dividends they receive, leading to double taxation. On the other hand, an S corporation doesn't pay corporate tax and operates under a pass-through taxation setup, where the profits move to the shareholders and to their personal income tax. An LLC can choose to be taxed as a C corporation if it prefers to retain cash within the company, as opposed to distributing it to the owners. This might be a preferred option for businesses with outside investors, as they often prefer the structure of a C corporation. On the other hand, an LLC can elect to be taxed as an S corporation if it meets certain eligibility criteria. This can help small businesses save on taxes, as the profits are passed directly to the shareholders and taxed at their personal income tax rate.
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