Did you know that the US Chamber of Commerce reported a record-breaking 5.5 million new business applications in 2023? If you’re among these entrepreneurs, choosing the right tax classification for your LLC could make a significant financial difference.
Deciding between filing as a corporation or partnership can impact your tax obligations, liability, and how much profit you keep. Keep reading to find out what factors to consider to make the best choice for your LLC's unique needs.
What is the Difference Between an LLC and a Corporation?
How Does an LLC Differ from a Corporation?
An LLC, or Limited Liability Company, and a corporation each provide distinct advantages for business owners, but their structures vary widely. LLCs offer more flexibility and fewer formalities compared to corporations. With an LLC, you don’t need the strict corporate paperwork or annual meetings that a C corporation requires, making it easier to establish and maintain, especially for small businesses.
LLCs can have one or multiple members (owners), allowing more operational flexibility and reducing the layers of Internal Revenue Service (IRS) filings. Ownership also differs. In a corporation, ownership is divided among shareholders who receive shares representing their stake, which is advantageous if you want to bring on an investor or go public.
However, LLC members enjoy a less formal structure, with the flexibility to distribute profits and losses in any agreed-upon way, outlined in an operating agreement rather than issuing corporate shares. Each member's share of profits and losses can be adjusted based on their investment, giving LLCs a “hybrid” characteristic that combines aspects of corporations and partnerships.
Is an LLC Taxed the Same as a Corporation?
No, LLCs and corporations are taxed differently. By default, an LLC is a pass-through entity, so profits and losses are reported directly on each member's personal income tax return. This allows LLC members to avoid “double taxation,” where profits are taxed at both the corporate level and again on individual shareholders’ tax returns.
A C corporation, however, is taxed separately at the federal tax rate, and then dividends distributed to shareholders are taxed again on personal income taxes. LLCs can elect to be taxed like a corporation (either a C corporation or S corporation).
This is by filing the appropriate IRS forms—Form 8832 to be taxed as a corporation or Form 2553 for an S corporation classification. The S corporation structure, in particular, allows LLC members to save on self-employment taxes, as only a portion of profits, paid as a salary, is taxed this way.
Further Reading: Your LLC taxes guide
What Are the Tax Classification Options for an LLC in 2025?
What Tax Classification Options Are Available for LLCs?
The IRS allows LLCs to choose from multiple tax classification options based on their unique business goals. By default, single-member LLCs are classified as sole proprietorships, while multi-member LLCs are classified as partnerships for tax purposes. Both options mean that earnings are passed directly to individual members, who report them on personal tax returns.
However, LLCs may also elect to be taxed as a corporation—either a C corporation or S corporation—to take advantage of specific tax benefits. For example, choosing C corporation status may make sense if your LLC plans to retain earnings or reinvest significantly in the business.
S corporation status, on the other hand, allows LLC owners to save on self-employment taxes by drawing a salary while still benefiting from pass-through taxation on the remaining profits. Each tax classification impacts your tax rate, filing requirements, and potential for profit retention differently.
Should You File Your LLC as an S Corporation or Partnership?
Electing S corporation status for your LLC can offer tax savings, especially if you’re looking to reduce self-employment taxes. This classification allows LLC owners to pay themselves a salary, which is subject to employment taxes, while the rest of the earnings are distributed and only taxed at the individual member's income rate.
However, LLCs that elect S corporation status must file additional paperwork, including payroll forms and a Form 1120S with the IRS. In contrast, defaulting to partnership taxation is simpler and avoids the strict salary requirements of an S corporation.
Many small business owners prefer the partnership model because it’s easier to manage, and profits are passed directly to individual members without a corporate layer. Consider whether the administrative costs of an S corporation setup are worth the tax savings for your LLC’s business structure.
Further Reading: Learn about partnership taxation
How Can Tax Rates and Forms Affect Your LLC’s Bottom Line?
What is the LLC Tax Rate Compared to Corporations?
An LLC’s tax rate depends on its classification with the IRS. A pass-through LLC pays no federal tax at the entity level, as profits and losses flow to individual members’ tax returns. In contrast, corporations are subject to the federal corporate tax rate of 21%, with dividends taxed again when distributed to shareholders. Electing S corporation status can help you save on self-employment taxes, but you’ll need to consider the added regulatory requirements.
For business owners interested in maximizing profit retention, choosing the right tax classification is crucial. If keeping earnings in the business or attracting investors is a priority, the C corporation route may make sense despite double taxation, as it allows for profit reinvestment without immediate tax on individual owners.
Which Tax Forms Do LLCs Need to File?
The tax forms you’ll need for your LLC depend on its classification. Partnership LLCs must file Form 1065 to report income, deductions, and credits, while LLCs with S corporation status must file Form 1120S. C corporations also must file Form 1120 and adhere to corporate tax requirements.
Single-member LLCs report earnings on Schedule C within their personal tax returns. Remember, if you’re electing corporate taxation, Form 8832 and, for S corporation status, Form 2553 are crucial to register your LLC’s tax classification with the IRS.
Further Reading: Know the tax implications for LLC
Should You Consider Liability and Profit When Choosing Your LLC’s Tax Classification?
How Does Limited Liability Protection Work for Different Entity Types?
An LLC is a business entity that protects individual members from business debts and lawsuits. This limited liability means creditors cannot claim your personal assets—like your house or savings—if the company is in debt or sued.
However, you’re personally liable if you don’t follow formalities, like keeping business finances separate or using a registered agent. It’s important to understand that LLCs provide liability protection across tax classifications, whether as a corporation or partnership.
Do You Want Maximum Profit Retention or Reinvestment?
For profit retention, partnership tax status avoids double taxation, passing taxable profits directly to your personal tax return. If your company’s goal is growth, C corporation status allows profits to stay within the business's assets for reinvestment, though it involves double taxation.
Electing S corporation status offers a blend of taxable income flow and savings on self-employment taxes through a salary structure. For guidance in choosing, consult a tax professional to align your formation process with your business goals.
How Taxfyle Can Help You Decide if Your LLC Should File as a Corporation or Partnership
Expert Guidance on LLC and Corporation Tax Choices
Taxfyle provides expert accounting guidance to help many business owners decide if their LLC should file as a corporation or partnership. Taxfyle’s platform connects you with experienced professionals who understand the characteristics of a corporation versus an LLC, such as corporations and limited liability protections, LLC operating requirements, and state incorporation regulations.
Key Questions to Ask When Choosing Your LLC’s Tax Structure
To determine whether your LLC may benefit from corporate or partnership tax status, consider questions like:
- Do you want individual shareholders or single-member ownership?
- Does the LLC provide enough flexibility, or do you need more regulations similar to a corporation’s?
You’ll also need to consider permits, disclosures, certificates of incorporation, and whether unlimited liability protection applies. With Taxfyle, you’ll gain clarity on these factors to make an informed choice.
Key Takeaways
- Single Owner: Single-member LLCs can choose to be taxed as corporations or disregarded entities.
- Sub-Corporation: Converting a corporation into an LLC may offer tax benefits.
- State Regulations: Each state has specific rules to establish and regulate LLCs.
- Compliance: You may need permits and must also adhere to state requirements.
- Restrictions: Some states prohibit certain businesses from forming as LLCs.
How can Taxfyle help?
Finding an accountant to file taxes is a big decision. Luckily, you don't have to handle the search on your own.
At Taxfyle, we connect you with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will file your file taxes for you.
