Taxes differences between LLC and Corporation in Florida
One of the biggest differences between corporations and LLCs is the way they are taxed. Let’s examine how taxation for each business structure works.
LLC Taxes
An LLC is taxed as a pass-through entity by default. This means that the profits of the business are “passed through” to the owners (called members). Profits and losses are reported on the individual tax returns for the owners, and not at the business level. As a result, filing taxes is often simpler for owners of an LLC. Any losses or operating costs of the business can be deducted on personal tax returns, which can help offset other income.
The rate at which an LLC is taxed depends on the total income of the owner, as it does when you file as a sole proprietor. Owners of an LLC may also be required to pay self-employment taxes. Some states require LLCs to pay a franchise tax. This is a tax issued by the state for the privilege of doing business in that state. Franchise taxes are usually paid annually and vary from state to state.
What happens if you do not pay your taxes? Failing to pay on time or at all could result in penalties and even the involuntary dissolution of your business.
Luckily, incorporating as an LLC provides entrepreneurs with flexibility. An LLC may elect to be taxed as Corporation or an C Corporation. While it is an uncommon choice, filing an LLC as a C Corp tax designation does make financial sense for some businesses.
Corporation Taxes
Corporations are taxed as a separate legal entity, which can earn its own income. Corporations are responsible for paying tax on their profits, (corporate tax), and tax on dividends the entity distributes to its shareholders. Since dividends are not tax deductible (like salaries and bonuses), dividends are taxed twice. This is referred to as double taxation. This is not an issue for smaller corporations where only the owners work for the corporation. Instead, owners receive tax deductible salaries and bonuses.
corporation-taxes
While double taxation is seen as a disadvantage for businesses choosing to file as a corporation, this additional tax responsibility can often be offset by federal deductions that are only available to corporations.
For example, a corporation may deduct all its business expenses. These can include advertising costs and operating expenses as well as certain employee fringe benefits such as medical and retirement plans. These deductions all add up to substantial savings over time for the business
Flat tax
As of 2018, corporations pay a flat tax of 21% on their profits, which is lower than the top five individual tax rates. While this is largely offset by double taxation, any income the corporation chooses to retain at the end of the year will be taxed only once at the new 21% rate. This allows the owners of the corporation to save on taxes by investing some profits back into the business.
Keep in mind if a corporation has fewer than 100 shareholders, it can file an S Corporation election. This is a tax status that allows a business to be treated as a pass-through entity much like an LLC. This may be a good option for businesses who want to be taxed like an LLC, but also want some of the additional formalities a corporation provides. The S Corporation designation does allow flow-through taxation (no corporate tax), but there are certain requirements to qualify as an S Corp that may limit its utility to a business. Don’t worry, we could help you doing it – whatsapp us.
S Corporation
If a business qualifies as an S Corporation, the tax difference between an LLC and S Corp is a bit more nuanced. Both an LLC and an S Corp has flow-through taxation (no double taxation). Keep in mind that an LLC’s distribution of profits are subject to an employment tax, whereas an S Corp’s dividends are not.
s-corporation
With careful planning, a small business can avoid significant employment taxes by electing to become an S Corp. However, there can be drawbacks of an S Corp that may deter a small business from taking this advantage. Always consult a professional before deciding on whether to be taxed as an LLC or S Corporation.