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What are the Tax Advantages and Disadvantages of an LLC?

what are the tax benefits of an llc

By Jean Murray. US Business Law / Taxes Expert

Jean Murray has the education and experience to help you become an expert in your small business, and to provide you with information about business legal and tax issues. With an MBA and a PhD in entrepreneurship, she brings almost 30 years of experience and knowledge to these important business subjects.

You can also read more about Jean's current and past work on her page.

DISCLAIMER: I am not a CPA or attorney, and nothing on this site in articles, emails, blog posts, or other communications is intended to be tax or legal advice. The purpose of this site is to provide general information to readers. No claim is made regarding the accuracy or legal status of information on this site. Federal, state, and local laws and regulations change, and every business situation is unique. Readers should not take action on any tax or legal matter without reviewing options with a tax advisor or attorney.

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The default tax status of an LLC with more than one owner (member) is to be taxed as a partnership.

In either case, the LLC doesn't pay taxes directly, but the business net income is taxed through the personal tax return of the owner or owners - as a sole proprietorship. for a one-member LLC or as a partnership for a multiple-member LLC.

A corporation pays corporate taxes  and the owners of the corporation are

considered to be employees if they work in the business (otherwise, they are considered shareholders).There are tax advantages and disadvantages of the LLC vs.

a corporation.

Tax Advantages of the LLC

  • The tax rate for an LLC depends on the total income of the owner. At higher levels of net income. the LLC may be paying taxes at a lower tax rate than a corporation. 
  • Corporate owners may be subject to double taxation. while an LLC owner is not. Corporate owners have double taxation, paying taxes on the income of the corporation and on income from dividends .

Tax Disadvantages of the LLC

  • LLC owners must pay taxes on their distributive share of the profit of the company, even if they have not received a distribution of those profits. Owners of a corporation do not pay taxes on profits unless they are distributed, usually in the form of dividends .

Disclaimer: Every company's tax situation is different, and tax situations change over time as a company grows and becomes more profitable. I am not a CPA or an attorney and nothing in this article or on this site should be considered as tax or legal advice. My purpose is to give you general information about this subject so you can discuss it with your tax adviser. Be sure to have this discussion before you make any decisions on the structure of your business or changing that structure.

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