Default Tax Advantages: LLC or Corporation?

Small Business Forums Starting a Business Default Tax Advantages: LLC or Corporation?

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    Paul Harrison
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    I was thinking I may invest in rental real estate to help have a source of profit. Someone told me that an LLC would prevent “double taxation.”

    Can someone explain this to me in a little more detail? I am very familiar with tax forms and business structure so I need help understanding what the process would be/

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    LLC’s are treated as if they were sole-proprietorship (single member LLC ‘s), partnerships (multi-member LLC’s) or S-corporations (if the members of the LLC qualify and the LLC elects this treatment). These are all “pass-through” entities, meaning that profits of the LLC are not taxed directly, but are counted as part of the income of the person(s) to whom the profits are passed and taxed on that basis. Note that the profits are taxed as income to the “shareholders” even if no “dividend” is actually paid and all monies are retained by the LLC (or S-corp).

    On the other hand, a C-corporation is a separate entity and its profits are taxed as income to the corporation, and then when those profits are passed on to the shareholders of the corporation as dividends, they are taxed again as income to the shareholders. Of course, if the Corporation retains those profits (i.e. for re-investment in the business) and doesn’t pay them out as dividends to the shareholders, the shareholders do not get taxed on dividends they did not receive.

    That’s how I understand it at least, I’m not really sure about the relative advantages or disadvantages of an LLC vs. an S-corp, and it likely depends on your local laws, the type of business you are in, and who-all is involved in the business (i.e. the number of partners in the business, and their relative contributions to the enterprise).

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