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.”
- February 25, 2020 at 6:34 pm
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/00
Edward L. McLaughlinParticipantLLC’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).
- March 10, 2020 at 5:27 pm
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).00
Wow that’s a lot to take in when it comes to understanding how they treat LLC’s differently. I guess I’ll have to do a little more research into my states laws when it comes to the up and downs. Thanks!00
- April 7, 2020 at 1:28 pm
Akshay MParticipantI’d rather recommend you LLC.
- June 5, 2020 at 3:28 pm
Quick Comparison: LLC vs. S-Corporation
Difference in income allocation:
While S-Corporation special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests, while an S-Corporation may only have one class of stock.
Any number of individuals or entities may own interest in an LLC. Also, LLCs are allowed to have subsidiaries without restriction. Ownership interest in an S-Corporation is limited to no more than 100 shareholders. On top of that S-Corporations cannot be owned by C-Corporations, other S-Corporations, many trusts, LLCs, partnerships, or non-resident aliens.
One advantage of S-Corporation is the way self employment taxes are calculated. S-Corporation owners employed by the company must receive salary, and their self employemnt tax is caluclated based on that salary (this is true with the exception of S-Corporations based in New York City). Owners of LLC, on the other hand, pay self employment taxes based on all member distributions they receive.00
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