BASIC TAX TREATMENT OF CORPORATIONS and LLC's
By: Robert D. Johnson, Esq.*
2575 So. Cimarron Rd., Suite 202
Las Vegas, Nevada 89117
*Licensed to practice law in Nevada and Utah
(Used with permission)
The default tax treatment for a corporation is what is referred to as "C Corporation" status. A C-Corporation suffers a double taxation effect. This occurs because the corporation is taxed at the corporation level when the company generates a profit and the
shareholders of the corporation are also taxed at the individual level when they receive a dividend from the corporation. To be taxed as a C-Corporation, the corporation need not make any election with the IRS, as this is the default tax treatment for a corporation.
S-Corporation treatment allows qualifying corporations to receive more favorable tax treatment by the IRS, by eliminating the double taxation effect that occurs with CCorporation treatment. In order to receive S-Corporation tax status, the corporation must affirmatively "elect" to be taxed as an S-Corporation by filing the election form with the IRS and all of the shareholders must be qualifying shareholders. S-Corporation treatment transforms the corporation, for tax purposes, into a "flow-through" entity, allowing the profits and losses of the
corporation to automatically "flow through" to the individual shareholders.
Hence, the corporation itself does not pay federal income taxes (although the corporation will file a return to report the profit or loss). Thus, S-Corporation treatment is generally desirable and more favorable to the shareholder.
The default tax treatment for an LLC is much like that of the S-Corporation. The default IRS tax treatment for a single member LLC is what is called "disregarded entity" status. In other words, the IRS, for tax purposes only, disregards the existence of the LLC and the profits and
losses of the LLC automatically flow through to the members who pay the tax at the individual level. A multiple member LLC is treated by the IRS as a "partnership" and the profits and losses of the LLC are attributed to the individual members and tax paid at the individual member level (the LLC will file a partnership return to report the profit or loss). (Note that, under current IRS rules, an LLC may elect to be treated as an S-Corporation by timely filing the S-Corporation election. Such an election does not change the legal status of the LLC outside of the "tax world." (While an S-Corporation election may, in some instances, have some tax advantage, the decision as to whether or not an LLC should elect to be treated as an S-Corporation is a decision that should be made only after careful consideration and consultation with a qualified tax professional).