Frequently Asked Questions

What are the tax implications of converting an LLC to a corporation?

Converting an LLC to a corporation can have significant tax implications. When an LLC is converted to a corporation, the taxation structure changes. Corporations are taxed as C corps, meaning they are taxed on the amount of profit made, and shareholders also have to pay personal income tax on their dividends. This is often referred to as double taxation. However, corporations can also opt to be taxed as S corps, where the entire profit is passed to the shareholder’s personal taxes, avoiding double taxation and potentially saving money in tax payments. On the other hand, LLCs have the option to be taxed like corporations or to pay taxes as sole proprietorships and partnerships, where the money made and lost goes straight to personal income taxes. This flexibility in taxation is one of the reasons why LLCs are popular among small businesses. Another tax implication of converting an LLC to a corporation is the potential decrease in self-employment tax. Owners of an LLC are treated as if they are self-employed, requiring the payment of Medicare and Social Security taxes on all the business's profits. In contrast, corporations can provide compensation through stocks, which can be an effective way to decrease self-employment tax.