Forming a limited liability company (LLC) is one of the most efficient ways to start a new business. This option is particularly attractive to entrepreneurs who want to run a solo business with limited liability protection.
In this article, you will discover what happens when a single-member LLC elects to be treated as a C-Corp for tax purposes.
Why Would a Single-Member LLC Elect C-Corp Status for Tax Purposes?
A single-member LLC is easy to establish and run, but things can eventually get more complex as the business operations grow further. For example, sharing equity with shareholders is not the reality of LLCs owned by one sole member.
If the plan is to keep things under control and stay small in the long term, a single-member LLC can be an excellent solution. However, if an entrepreneur chooses a single-member LLC structure for a business with enormous potential to grow bigger, it might eventually require a change.
In such cases, the owner of a single-member LLC may convert the entity to a C-Corp. Corporate entities by default, C-Corps offer limited liability protection with the possibility to share equity and distribute shares to new owners (shareholders).
Single-Member LLC to C-Corp – Tax Consequences
When a single-member LLC opts for C-Corp status, it will heavily impact the entity both in the short and long term. The first consequence is the loss of “pass-through” status for tax purposes. Single-member LLCs can elect to be treated as S-Corps, which means they can enjoy “pass-through” taxation.
In such cases, all the income generated by the single-member LLC passes through the company to the sole owner’s tax returns, automatically avoiding double taxation. While C-Corps may offer a better structure for businesses growing exponentially, it also incurs double taxation.
The owner of a single-member LLC is considered “self-employed” by IRS, which means the federal agency expects him or her to pay Social Security and Medicare taxes on the LLC’s net income.
Conversely, shareholders of C-Corps are exposed to taxation at two different levels – the corporate level and the personal level. The income generated by the company is subject to taxes, and shareholders must also pay taxes on any dividends received.
If you do not want to be subject to income tax on your salary and pay additional tax on any dividends or shares sold to other people, electing C-Corp status is not an ideal approach. Once the single-member LLC is converted to a C-Corp, the member must file one last tax return.
Failing to meet this requirement may expose the LLC’s sole member to hefty penalty fees proportional to every month that the return is late.
Identifying whether electing C-Corp status for a single-member LLC requires an in-depth assessment from a professional accountant. The process involves loads of paperwork, asset transfers, and precise action.
For example, if you opt for converting a single-member LLC to a C-Corp, it is crucial to pay attention to the total value of the assets transferred to the new business structure not to incur additional taxes by “unloading” liabilities into the new company.
Single-Member LLC vs. C Corp Taxation – Immediately Contact an Expert CPA
Waste no time with uncertainty. Contact Edward D. Quilca, CPA by calling (786) 310- 5582 or emailing [email protected] to identify whether converting a single-member LLC to a C-Corp is an ideal solution.
