Tax Differences of LLCs & PCs

By David Carnes

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the same limited liability benefits as a corporation. All states now allow one-member LLCs; some states allow professionals to form professional limited liability companies, or PLLCs. A professional corporation, or PC is a special type of corporation designed for professionals such as lawyers and accountants. LLCs and PCs are taxed quite differently.

Basic Taxation Scheme for LLCs

An LLC with at least two members is taxed as a partnership at the federal level unless it elects to be taxed as a corporation. This means that the LLC itself is not taxed, although it must file an informational federal income tax return. The IRS taxes individual LLC members in proportion to their ownership interests in the LLC. Members are taxed on all of the LLC's taxable income every year, regardless of whether the LLC actually distributes income to its members. If the LLC has only one member, he is taxed at individual income tax rates unless he elects to be taxed as a corporation. If the single-member LLC is an entity -- such as a corporation, trust or estate -- it is taxed at the rate applicable to that entity. LLC members must pay self-employment tax on their shares of the LLC's taxable income.

Basic Taxation Scheme of a PC

A PC is taxed in a manner similar to a "C" corporation unless it elects to be taxed as an "S" corporation. Under C corporation taxation, the entity itself is taxed at corporate tax rates and must file a corporate income tax return. PC shareholders must be individuals and are taxed at individual income tax rates. Shareholders are taxed only when the corporation actually distributes income to them -- in the form of salary or dividends, for example. This double taxation is particularly burdensome because PCs are generally taxed at the highest corporate tax rate of 35 percent.

Ready to start your LLC? Start an LLC Online Now

Special Features of PC Taxation Scheme

Although PCs are taxed almost identically to "C" corporations, PC shareholders do enjoy two tax advantages that are unavailable to ordinary corporate shareholders. Shareholder-employees are eligible for group, term life insurance of up to $50,000 per employee. The corporation may deduct the cost of these premiums from its taxable income; the shareholder-employee is not taxed on these amounts. In addition, shareholder-employees are eligible for health and accident insurance plans. The corporation may deduct the cost of premiums; the shareholder-employees are not taxed on these amounts.

The Corporate Taxation Election

An LLC may elect to be taxed as a C corporation; both LLCs and PCs may elect to be taxed as S corporations by filing the appropriate forms with the IRS. In an S corporation, like an LLC, all business profits "pass through" to the owners. Forming an S corporation generally allows the owner/owners to pass business losses through to their personal income tax returns, where they can use it to offset any income that they and their spouses, have from other sources. S corporation owners/shareholders are not subject to self-employment taxes as active LLC members are. PCs that elect to be taxed as S corporations are exempt from the higher tax rates applicable to personal service income. The S corporation does not pay income tax, but an S corporation with more than one owner must file an informational tax return.

Ready to start your LLC? Start an LLC Online Now
Massachusetts LLC Vs. S Corp


Related articles

Tax Planning for an S Corporation

If you incorporate or create a limited liability company (LLC) for your small business, you may be able to designate it as an S corporation for federal income and self-employment tax purposes. Most of the income tax planning for an S corporation will be of more use to a corporation than an LLC, but LLC members still stand to save a substantial amount of self-employment tax with an S corporation election.

LLC Vs. S Corporation in Kentucky

One of the most important decisions to make when you start a business is what business structure to use, and there are several to choose from in Kentucky. Two common structures are the limited liability company and the Subchapter S corporation. Both forms offer similar liability protection, but have different formation requirements, structures and rules for operation.

Advantages & Disadvantages of an LLC in Iowa

A limited liability company, or LLC, is a form of business association that combines the limited liability benefits of a corporation with the pass-through federal taxation and management flexibility of a partnership. Organizing as an Iowa LLC may be the best choice for a person looking to start a small business in the state; however, while forming an Iowa LLC has many benefits for small business owners, there are also a number of disadvantages.

LLCs, Corporations, Patents, Attorney Help

Related articles

Advantages of LLC vs. an S-Corporation

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate ...

IRS LLC Filing Requirements

The U.S. Internal Revenue Code does not recognize the limited liability company, or LLC, as a distinct taxable entity. ...

Incorporating Vs. LLC

One of the most important initial decisions in starting a business involves deciding what type of business entity your ...

What Are the Tax Advantages of LLCs?

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability ...

Browse by category
Ready to Begin? GET STARTED