"Tax-Efficient Business Structures: LLC vs S-Corp vs C-Corp"
Talha Arshad
Associate Accounts and Finance | ACCA Part-Qualified | QuickBooks Online Pro Advisor | Bookkeeping | Year-end Accounting | Financial Reporting | Financial Analyst
LLC (Limited Liability Company)
- Taxation: LLCs typically have pass-through taxation, meaning profits and losses are reported on the individual tax returns of the owners, avoiding corporate taxation.
- Flexibility: LLCs offer flexibility in profit distribution among members.
- Self-Employment Taxes: Members of an LLC are subject to self-employment taxes on their share of the profits.
- Pros: Simple structure, fewer compliance requirements, and no double taxation.
- Cons: Limited in terms of attracting investors and raising capital.
S-Corp (S Corporation)
- Taxation: Like LLCs, S-Corps are pass-through entities, but they allow owners to be treated as employees for tax purposes.
- Salary and Dividend Payments: Owners can draw a salary and receive dividends, which can be taxed at a lower rate than income.
- Self-Employment Taxes: Salary is subject to employment taxes, but dividends are not, potentially reducing self-employment taxes.
- Pros: Tax-saving potential on dividends, credibility in the business world.
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- Cons: Stricter operational requirements, limits on number and type of shareholders.
C-Corp (C Corporation)
- Taxation: C-Corps are subject to corporate income tax. Profits distributed as dividends are taxed again at the individual shareholder level, leading to double taxation.
- Corporate Tax Rate: C-Corps benefit from a flat corporate tax rate, which can be advantageous for higher-income businesses.
- Retained Earnings: C-Corps can retain and reinvest profits in the company without immediate tax implications to shareholders.
- Pros: Ability to raise capital through stock sales, unlimited shareholders, and enhanced credibility.
- Cons: Double taxation, more complex and costly to operate.
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