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What are the Tax Advantages and Disadvantages of an LLC?


Question: What are the Tax Advantages and Disadvantages of an LLC?
A limited liability company is usually taxed through the personal tax return of the owner - as a sole proprietorship, for a one-member LLC or as a partnership for a multiple-member LLC. A corporation pays corporate taxes. There are tax advantages and disadvantages of the LLC vs. a corporation or S corporation.

Tax Advantages of the LLC

  • The tax rate for an LLC depends on the total income of the owner. At higher levels of net income, the LLC may be less taxes than the corporation.
  • The LLC structure does not subject the owner to double taxation. Corporate owners have double taxation, paying taxes on the income of the corporation and on income from dividends.

Tax Disadvantages of the LLC

  • LLC owners must pay taxes on their distributive share of the profit of the company, even if they have not received a distribution of those profits. Owners of a corporation do not pay taxes on profits unless they are distributed, usually in the form of dividends.
  • Some states exempt corporations from property tax, but not other entities, including LLCs.
  • LLC owners must pay self-employment taxes (Social Security/Medicare), while corporate owners who serve as employees only pay half of the self-employment tax amount on their salaries; the rest is paid by the corporation.

Disclaimer: Every company's tax situation is different, and tax situations change over time as a company grows and becomes more profitable. My purpose is to give you general information about this subject so you can discuss it with your tax adviser. Be sure to have this discussion before you make any decisions on the structure of your business or changing that structure.

Back to All About LLCs and Taxes

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