Tax
flexibility.
By default, LLC s are treated as a "pass-through"
entity for tax purposes, much like a sole proprietorship or partnership.
This means that LLC s avoid double taxation. Furthermore, an LLC owner is
not required to pay unemployment insurance taxes on his or her own
salary. However, an LLC can also elect to be treated like a corporation
for tax purposes, whether as a C corporation or an S corporation.
Disadvantages of an LLC compared to a corporation
Profits are subject to Social Security
and Medicare taxes.
In some cases, LLC owners may end up paying more taxes
than owners of a corporation. Salaries and profits of an LLC are subject
to self-employment taxes, currently equal to a combined 15.3%. With a
corporation, only salaries (and not profits) are subject to such taxes.
This disadvantage is most significant for owners who take a salary of
less than $90,000.
Owners must immediately recognize
profits.
A C corporation does not have to immediately
distribute profits to its shareholders as a dividend. This means that
shareholders in a C corporation are not always taxed on the
corporation's profits. Because an LLC is not subject to double-taxation,
profits are automatically included in a member's income.
Fewer fringe benefits.
Employees of an LLC who receive fringe benefits, such
as group insurance, medical reimbursement plans, medical insurance and
parking, must treat these benefits as taxable income. The same is true
for employees who own more than 2% of an S corporation. However, C
corporation employees who receive fringe benefits do not have to report
these benefits as taxable income.
