SMLLC – treated with corporate taxation
I recently formed an SMLLC but I plan to elect corporate tax treatment on the Form 8832. What sort of disadvantages should I expect by electing to be taxed as a corporation? I already filed an SS-4 and received an EIN. I do not plan to have any employees but wanted the tax ID to conduct business with certain entities requiring it.
Second question, each year if I elect to be taxed like a corporation what forms will I have to file (formed in Delaware, doing business only in North Carolina).
Third question, if taxed as a corporate entity how do I distribute profits to my personal account? Do I execute payroll or simple transfer it and report the earning on my personal tax return? Finally, what are the tax rates of a corporation?
I’m interested in why you chose to be taxed as a corporation rather than as a partnership. Did someone suggest this to you, or did you read about it somewhere?
By choosing corporate taxation, your LLC will be taxed first at the corporate level, based on the LLC’s profits and losses. This will be reported on a corporate tax return and the taxes paid by the LLC.
Corporate tax rates start at 15% and go up to as high as 38%. I’ll post a chart soon, because this is common question.
In addition to corporate tax, when you distribute your corporation’s profits to yourself in the form of dividends, you will be taxed on those dividends as well. These dividends will be reported on your personal income tax return.
The scenario I just described above is what is called “double taxation”, and why many people choose entities like LLCs and partnerships–which are pass-through entities–instead of corporations.
You were correct in obtaining an EIN–every LLC needs an EIN, even if you don’t plan on having employees.
How to pay yourself as owner of an LLC…
There are two ways to pay yourself as the owner/member of an LLC.
The first is to put yourself on the payroll, and pay yourself like you would an employee. That means withholding taxes and the rest. Your LLC would have to setup itself with quarterly deposits of payroll taxes to the government. This is complicated and a hassle, which is why there are specialized companies like ADP which do payroll processing for you. Quickbooks/Intuit also has a payroll processing service for small businesses.
The other way to pay yourself, if your LLC is taxed as a partnership or a disregarded entity, is to simply write yourself a check from your business account to your personal account.
In partnership language this is called a partner’s “draw”. The advantage is that there is no withholding taxes or any of the other payroll complications.
Don’t get too excited, though–you still have to pay self-employment tax at the end of the year, and are required to make quarterly estimated taxes on your federal income tax. However, you have a little more control over the timing of your payments.
With your SMLLC taxed as a disregarded entity, you don’t file a separate tax return for your LLC. Instead, all your LLC’s income and expenses are reported on your Schedule C. Your total profit on your Schedule C is then made part of your personal 1040 return, and total tax owed (including self-employment tax, if any) is calculated from there.
Some people are confused by the term “disregarded entity”, thinking that it means that their SMLLC doesn’t exist, or doesn’t give them limited liability protection.
That’s not true. Disregarded entity is a term of art only for federal income taxation purposes, and has nothing to do with the limited liability protection of your LLC.
So long as you are diligent about keeping separate business and personal accounts, don’t commingle funds, observe LLC corporate formalities (which are less rigorous than c corporation formalities), and don’t commit fraud, your SMLLC corporate veil should stay intact and is not weakened by being considered a disregarded entity by the IRS.
Comments for SMLLC – treated with corporate taxation
I have filed form 8832 reclassifying from a SMLLC to a c-corp. Possibility of double taxation is not a concern. Prior to this year as a disregarded entity the biz had been filing as part of the 1040, now after we will file a 1020. It is my understanding that the SM will obtain stock in the amount of the net assets of the biz. When I file this 1020 the first time, will I indicate a new entity with 0 opening balance sheet and then show the transfer coming in or will the opening balance contain the transfer. Please advise.
That’s pretty complicated. I would speak with a CPA or tax attorney about this one.