When Limited Liability Companies Should Consider C Corporation Tax Elections

While most limited liability companies prefer their default partnership type or S corporation treatment, some may benefit from C corporate tax treatment. A few of the considerations that may make C corporation taxation attractive include:

  • Fewer limitations on certain types of deductions (such as employee life and medical insurance, childcare benefits, retirement plans and education reimbursements);
  • Possibly a lower overall income tax burden if the corporate tax rate is lower than the LLC members’ individual tax brackets;
  • More flexibility in determining the company’s fiscal year, potentially making it easier to carry profits and losses forward or backward; and
  • Fewer ownership restrictions than LLCs treated as S corporations.

Tax Benefits and Consequences to Consider

Effective since Jan. 1, 2018, the Tax Cuts and Jobs Act had delivered some changes specifically applicable to LLCs and C corporations. Clients should take the following issues into account when considering a C corporation tax election.

  • The C corporation tax rate became a flat 21%. (Previously the corporate tax rates ranged from 15 to 39%.)
  • For existing LLCs and S corporations, a pass-through entity income tax deduction, (the Qualified Business Income Deduction, for sole proprietorships, partnerships, disregarded entity LLCs and S corps) of 20% was implemented. Note, it is limited to specific industries. The deduction phases out at $326,600 in adjusted gross income for married filing jointly taxpayers and $163,300 for everyone else.

Aside from the TCJA changes, LLC members should also weigh whether the potential double taxation of C corporation profits will adversely affect them and their business financially.

Some other things to consider related to this topic:

An LLC can change back to being taxed as a sole proprietorship or partnership after electing C corporation tax treatment.  But the IRS has a 60-month limitation rule for LLCs that started as a disregarded entity and later filed Form 8832 to change to C corporation taxation. An LLC may not change back to its default method of taxation until 60 months after its election has been in effect.

Some exceptions exist to this rule. For example, the rule doesn’t apply to a newly formed LLC that elected C corporation tax treatment effective on the date of its formation. Also, the IRS may permit an LLC to change its election classification before the 60-month period has passed if more than half of the LLC’s ownership interests (as of the effective date of the election) are owned by individuals who didn’t own interests in the company on the effective (or filing) date of the corporate tax election.

If a multimember LLC wants to file for C corporation tax treatment, all members have to sign off on the change.  IRS form 8832 has a “Consent Statement and Signature(s)” section where LLC members, officers and managers must sign their names.  Owners of a multimember LLC considering making an C corporation tax election must agree on the tax treatment and follow the rules for how that affects their company and their own personal tax filings.  If an LLC files for C corporation tax treatment, all members on the company payroll will receive a W-2 from the corporation and a 1099-DIV for dividends paid to them.

Clients should understand that electing the C corporation tax election for an LLC does not change the underlying entity’s compliance obligations otherwise. When an LLC is taxed as a C corporation, it continues to follow the non-tax-related compliance rules and regulations for limited liability companies. For instance, it does not have to appoint a board of directors or adopt bylaws.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.