Frequently Asked Questions

What are the two ways corporations are taxed and how does it differ from the taxation of LLCs?

Corporations are taxed in two distinct ways, depending on whether they are classified as a C corporation or an S corporation. A C corporation is subject to double taxation, where the corporation pays taxes on its profits and then shareholders also pay personal tax on the dividends they receive. This double taxation on dividends is often seen as a disadvantage. On the other hand, an S corporation operates under a pass-through taxation setup. This means that the corporation itself does not pay corporate tax. Instead, the profits are passed on to the shareholders and are taxed as part of their personal income. However, only certain corporations are eligible for S designation. In contrast, a Limited Liability Company (LLC) does not have a specific tax classification. Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. The tax information of an LLC is recorded on the member's personal tax returns, and the member pays taxes on their share of the profits. An LLC can also elect to be taxed as a C- or S-corporation if they meet the necessary qualifications.