Can an LLC Really Be Taxed as a C Corp? – Yes, But Avoid This Mistake + FAQs

Lana Dolyna, EA, CTC

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Confused about whether an LLC can be taxed as a C corporation? You’re not alone.

Business owners often grapple with the distinctions between legal entity types and tax classifications. The good news: yes, an LLC can elect to be taxed as a C Corp.

But deciding whether to do so requires understanding complex tax rules, federal and state laws, and the potential benefits and pitfalls.

Quick Answer: Can an LLC Be Taxed as a C Corp?

Yes. An LLC (Limited Liability Company) can choose to be taxed as a C corporation by filing an election with the IRS. This is allowed under federal tax law. By default, the IRS does not treat an LLC as a C Corp automatically. Instead, an LLC’s default tax classification depends on the number of owners (called “members”):

A single-member LLC is disregarded for federal income tax, meaning it’s treated as part of the owner’s personal tax return (like a sole proprietorship).
A multi-member LLC is taxed by default as a partnership, with the LLC itself not paying income tax but passing through income to members’ personal returns via Schedule K-1.

If an LLC’s owners want the company to be taxed like a regular corporation (a “C Corp”), they must formally elect corporate taxation. This is done by submitting IRS Form 8832 (Entity Classification Election). Once approved, the LLC is treated as a separate taxpaying entity just like a traditional C corporation. It will pay corporate income tax on its profits and file a corporate tax return (Form 1120) each year. The owners, in turn, become shareholders for tax purposes: they generally only pay tax on money distributed from the LLC (such as dividends or salaries), similar to shareholders of a corporation.

In short: Legally an LLC, but taxed as a corporation. This election does not change the LLC’s legal structure under state law (it remains an LLC with the same liability protection), but for tax purposes it is treated like a C Corp.

Now that you have the quick answer, let’s dive deeper into what that means, how it works, and important considerations.

Understanding the Basics: LLC vs. C Corporation

To clarify how an LLC can be taxed as a C Corp, it’s important to understand some key terms and the difference between a legal entity type and a tax classification.

What Is an LLC?

An LLC (Limited Liability Company) is a business structure created under state law. It provides its owners (called members) with liability protection like a corporation, meaning personal assets are generally protected from business debts or lawsuits. However, an LLC is very flexible in how it can be taxed. By federal default, an LLC is not considered a separate taxpayer for income tax (unless it chooses to be). Instead, the IRS treats it as follows:

Single-member LLC (one owner): By default, it’s a “disregarded entity.” This means the IRS ignores the LLC as separate from the owner. All the LLC’s income, deductions, and credits are reported on the owner’s personal tax return (on Schedule C or other appropriate schedule, as if they were a sole proprietor). The LLC itself does not file a separate federal income tax return in this case.
Multi-member LLC (more than one owner): By default, it’s treated as a partnership for tax. The LLC must file an IRS Form 1065 (Partnership Return), but it does not pay tax on its own income. Instead, the profit or loss “passes through” to the members. Each member includes their share of the LLC’s income on their personal tax return (reported to them on a K-1 schedule). The members pay tax individually on their portions.

These default classifications are automatic under IRS rules unless the LLC opts out by filing a special election. Importantly, being a “disregarded entity” or partnership for tax has nothing to do with the LLC’s legal status – it remains an LLC in the eyes of the state, with limited liability for the owners.

What Is a C Corporation (C Corp)?

A C Corporation typically refers to a standard corporation (formed by filing Articles of Incorporation under state law) that is taxed separately from its owners under Subchapter C of the Internal Revenue Code. Key features of a C Corp’s taxation are:

The corporation is a separate legal and tax entity. It files its own tax return (Form 1120) and pays corporate income tax on its profits at the corporate tax rate.
The current federal corporate tax rate is a flat 21% on taxable income (as of the Tax Cuts and Jobs Act of 2017, and continuing in 2024).
Shareholders (owners of the corporation) do not automatically pay tax on the corporation’s profits. They only pay tax when those profits are distributed to them as dividends (or when they sell their stock at a gain). Dividends to individual shareholders are generally taxed at the capital gains/dividend tax rate (often 15% for many taxpayers, or 20% for high incomes, etc.).
This leads to the famous “double taxation”: first the company pays corporate tax on its profits, then the shareholders pay tax on dividends (because dividends are paid from after-tax profits). If a shareholder is also an employee of the corporation, they would also pay tax on any salary received, but that salary is a deductible expense for the corporation (reducing corporate profits).

Not all corporations are C Corps by tax: a corporation can make an S corporation election (under Subchapter S), which allows certain corporations to be taxed more like partnerships (avoiding corporate tax, with income passing through to owners). We’ll touch on S Corps later, but for now, a “C Corp” means the corporation pays its own tax.

Tax Classification vs. Legal Entity Type

It’s crucial to separate the idea of the legal entity from how it’s taxed:

LLC vs Corporation (Legal): LLCs and corporations are distinct legal entities under state law. An LLC has members and an operating agreement, typically less rigid formality requirements, and can choose how to allocate profits in its operating agreement. A corporation has shareholders, a board of directors, bylaws, and issues stock; it generally has more formal requirements by law.
Tax Status (election): The IRS doesn’t have a “LLC” tax form. Instead, it classifies business entities into tax categories (disregarded entity, partnership, C corporation, or S corporation). By default, corporations formed under state law are taxed as C corporations (unless S status is chosen). By default, LLCs are taxed as pass-through entities (sole proprietorship or partnership). However, eligible entities (a category that includes LLCs) can check the box to choose a different tax status. This is where Form 8832 comes in.

In other words, an LLC can morph into a different tax identity without changing its legal entity type. You can have an LLC (legal) that’s taxed as a partnership, or the same LLC taxed as a corporation, simply by making the proper election with the IRS. Conversely, if you had a corporation legally, you cannot choose to be taxed as a partnership – corporations are stuck with corporate or S corp taxation by virtue of being a corporation.

Key entities and terms:

Internal Revenue Service (IRS): The U.S. federal agency under the Department of the Treasury that collects taxes and sets tax rules. The IRS provides the framework (through the tax code and regulations) that allows LLCs to choose their tax classification.
U.S. Treasury Department: The parent department of the IRS. Treasury Regulations (which have the force of law) include the “check-the-box” rules that let LLCs elect their tax status. In fact, the option for LLCs to be taxed as corporations comes from Treasury/IRS regulations established in the late 1997.
Form 8832 (Entity Classification Election): The IRS form an LLC uses to change its tax status. On this form, the LLC can elect to be classified as an association taxable as a corporation (or revert to partnership/sole proprietor status if it had previously elected differently). Filing this form with the IRS is necessary to be taxed as a C Corp (unless you directly formed a corporation to begin with). There’s also Form 2553 (Election by a Small Business Corporation), which an LLC would file after Form 8832 if it specifically wants S Corporation status – but an S Corp election is a special case; if you want to be taxed as a regular C Corp, Form 8832 alone suffices.
Pass-through entity: A business that doesn’t pay income tax itself, but “passes” income and deductions to the owners’ personal tax returns (examples: partnerships, S Corps, and default-taxed LLCs). LLCs are pass-through by default unless they elect otherwise.
Double taxation: The situation for C Corps where income is taxed twice – once at the corporate level, and again at the owner level when profits are paid out as dividends. Avoiding or minimizing double taxation is often a factor in the decision of whether to elect C Corp status.

With these basics in mind, let’s explore how an LLC actually goes about electing C Corp taxation under federal law.

Federal Tax Law: How an LLC Elects to Be Taxed as a C Corp

Under federal law, specifically IRS and Treasury regulations, an LLC is considered an “eligible entity” that can choose its classification for tax purposes. By default, as we covered, an LLC with one member is disregarded, and with multiple members is a partnership. To elect C Corp taxation, the LLC must follow a procedure:

Making the Election – The Check-the-Box Rules

The IRS’s “check-the-box” regulations (found in Treasury Reg. §301.7701-3) allow certain business entities to simply check a box on a form to choose their tax classification. An LLC is the prime example of such an entity.

Steps for an LLC to Elect C Corp Taxation:

Member Consent: The members of the LLC should agree to the change in tax status. If there are multiple owners, this decision should be documented (often via a resolution or amendment in the operating agreement) because it can affect how profits are distributed and the LLC’s financial reporting. Typically, an LLC operating agreement might need to be updated to reflect that it will be taxed as a corporation and outline roles like who will act as officers for tax purposes.
File Form 8832 with the IRS: This is the crucial step. On Form 8832 (Entity Classification Election), the LLC provides its name, EIN (Employer Identification Number), and chooses to be classified as an “Association taxable as a corporation.” The LLC can also indicate the effective date of the change (which can be retroactive up to 75 days prior or future-dated up to 12 months). All owners (or an authorized owner/officer) should sign the form.
- If the LLC wants to be taxed as an S Corporation (which is a special tax status for small corporations that avoids double taxation), it generally first files Form 8832 to be a corporation, and then additionally files Form 2553 to elect S Corp status. (Note: There’s an alternative where a single-member LLC can directly file Form 2553 without Form 8832, since the act of filing 2553 is treated as an implicit election to be a corp and then S corp. But that’s a technical detail—what’s important is that electing C Corp status only needs Form 8832).
Submit on Time: Ensure that Form 8832 is submitted in a timely manner. If you want the LLC to be taxed as a C Corp for a particular tax year from January 1, you’d ideally file the form in the previous year or by early in that year with a specified effective date of Jan 1. If the form is filed late, the election might take effect later or you might need to request late election relief from IRS. (This gets into weeds, but the takeaway: timing matters for tax planning.)
IRS Confirmation: After filing, the IRS will send a letter confirming the classification election. Once accepted, the LLC will now be taxed as a corporation from the effective date forward.
Start Filing Corporate Tax Returns: The LLC (now for tax purposes a corporation) must file Form 1120 (U.S. Corporation Income Tax Return) for each year under that status. It will report its income and deductions and calculate tax just like any corporation would. It will also be subject to tax rules applicable to corporations (for example, rules on depreciation, fringe benefits, etc., which in some cases differ from partnership rules).
Ongoing Compliance: The LLC’s obligations now mirror that of a corporation. For instance, if the LLC pays salaries to owners or employees, it needs to handle payroll taxes and W-2s (as any employer corporation would). If it issues distributions of profits, those are considered dividends for tax purposes, and it may need to issue Form 1099-DIV to owners receiving significant dividends.

Once an LLC elects to be taxed as a corporation, IRS rules currently mandate that you generally must stick with that classification for 5 years before you can change again (to prevent flip-flopping to game the system). So it’s not something to toggle on and off freely every year; it’s a significant decision.

Federal Law Basis

The authority for this election comes from federal tax law and regulations. The IRS explicitly states that a domestic LLC with two or more members is by default a partnership “unless it files Form 8832 and elects to be treated as a corporation.” Likewise, a single-member LLC is disregarded “unless it files Form 8832 and elects to be treated as a corporation.” In short, the default is pass-through, but the law gives you the choice to check a box and be taxed as a corporation if you prefer.

It’s interesting to note that LLCs weren’t always this flexible. The check-the-box regulations came about in 1997, simplifying what used to be a complex multi-factor test to determine if an entity was more like a corporation or a partnership. Today, the IRS largely lets you choose. This means the federal government leaves the decision to the business owners, which can be quite beneficial for tax planning.

We’ve covered the federal side of how to make the election. Next, let’s consider how state taxes come into play and whether states follow these same rules.

State Tax Nuances: How States Treat LLCs Taxed as C Corps

Federal vs. State Tax: Changing your LLC’s federal tax classification to a corporation generally also affects your state taxes — but each state can have its own twist. Most states base their business income tax rules on the federal classification. However, you should be aware of a few state-level nuances:

Automatic Conformity: Many states say, in essence, “if the IRS treats your LLC as a corporation, we will too.” For example, California explicitly states that the federal classification is binding for state tax; an LLC taxed as a C Corp for federal purposes is taxed as a C Corp in California as well (no separate state election needed or allowed). Such an LLC must file a state corporate tax return (in California’s case, Form 100) and pay the state corporate tax (California’s corporate income tax rate is 8.84%). New York and many other states similarly follow the federal entity classification for income tax.
State Filing Requirements and Fees: Even if a state follows the federal classification, the LLC might still be subject to certain state-specific fees or franchise taxes due to its legal form. Using California as an example: all LLCs doing business in CA must pay an annual franchise tax of $800 to the state, regardless of how they’re taxed. In addition, LLCs traditionally pay a gross receipts-based LLC fee in CA if their revenues exceed certain thresholds. But if an LLC elects to be taxed as a corporation, it will generally file and pay taxes like a corporation (which also has at least an $800 minimum franchise tax in CA). The key point is that the legal form (LLC) can trigger certain obligations like annual fees, even if the tax form (corporate return) is different. Always check your state’s rules. Some states impose a yearly LLC fee or franchise tax separate from income tax, and electing C Corp status may not eliminate that if it’s tied to being an LLC legally.
Separate State Elections (or Lack Thereof): Most states do not require a separate classification election. They accept the federal classification. For instance, if your LLC files Form 8832 and becomes a C Corp for IRS purposes, the state will simply expect corporate tax returns. There are cases with S Corporations where a state might require an additional state-level S election (like New York or New Jersey for S corp status), but for a C Corp status, usually there’s no extra form – it’s the default if you’re taxed as a corporation.
States Without Income Tax: If you’re in a state like Texas, Washington, Florida, etc., where there’s no personal or corporate income tax (or in Texas, a franchise tax based on revenue), your federal classification might not change much in terms of state income tax, because there is none. However, even these states might have other business levies (Texas has a franchise “margin” tax on entities including LLCs and corporations).
Local Taxes: In some locales (like New York City), unincorporated businesses are subject to certain taxes that corporations are not, and vice versa. If you operate in a city or locality with business taxes, consider that your classification might affect those as well.

Example – New York State: If an LLC is taxed as a partnership, New York imposes an annual filing fee on the LLC based on its gross income. If that same LLC elects corporate status, that particular LLC filing fee no longer applies (because it’s not a partnership for tax anymore), but the LLC would now be subject to the state’s corporate franchise tax. So the tax burden shifts in form. In New York City, partnerships (including LLCs taxed as such) pay an Unincorporated Business Tax (UBT), whereas corporations pay a General Corporation Tax. So switching classification can change which tax you pay at the city level.

Big Picture: Always consider state and local tax consequences before electing C Corp status. In many cases, the election will simplify things (you’ll just file corporate taxes at state level too), but you might end up paying different types of taxes or fees. Consulting with a tax professional or checking your state’s Department of Revenue or Franchise Tax Board guidelines can clarify what happens in your state if an LLC becomes a corporation for tax.

Now that we have covered the legal framework and how the change is made at federal and state levels, let’s examine why an LLC would choose to be taxed as a C Corp. What are the advantages that might motivate this move, and conversely, what are the downsides and things to watch out for?

Advantages of Electing C Corp Taxation for an LLC

Why would owners of an LLC want their company taxed like a C Corp? Here are some potential benefits and strategic reasons:

Flat Corporate Tax Rate (21%) – If your LLC earns substantial profits, the flat federal corporate tax rate of 21% might be lower than the combined tax hit on that income flowing through to you personally. For example, if the business’s income would put you in the 32% personal tax bracket, keeping the income in the company could save tax in the short run. The LLC would pay 21% on the profits, and you’d defer personal tax until you take money out later (perhaps as dividends or salary in future years). This can be a form of tax deferral or rate arbitrage.
Retained Earnings for Growth – An LLC taxed as a C Corp can retain after-tax earnings within the company year-to-year without passing them to owners. In a default LLC, owners are taxed on all the profits each year even if those profits are not distributed. But in a C Corp setup, if the owners don’t need the money immediately, they can leave profits in the business (after paying 21% corporate tax on them) to reinvest or build cash reserves. The owners won’t pay personal tax on those retained earnings unless and until they are paid out as dividends. This can be useful for companies with growth plans, R&D, or expansion goals – essentially allowing the company to grow its capital at a lower current tax cost.
Possibility of Lower Overall Tax with Income Splitting – By carefully balancing salary vs. dividends, owners might optimize taxes. A strategy often cited is income splitting: the owner draws a reasonable salary (which is taxed to them as ordinary income but is a deduction for the company) and leaves the rest of profit in the company (taxed at 21%). The salary gives the owner income to live on and perhaps hits a lower personal bracket for the rest, while the remaining profit enjoys the lower corporate rate. For example, say an LLC makes $200k profit with one owner. As a sole proprietorship LLC, the owner pays income tax on $200k plus self-employment tax. As a C Corp, the owner might take a $100k salary (corp deducts it) and leave $100k profit taxed at 21% ($21k). The $100k salary is taxed to the owner, but maybe their effective personal rate on that is 22% ($22k). In that scenario, the immediate total tax ($43k) might be less than if all $200k was on their personal return in a high bracket plus self-employment tax. This works best if the corporate earnings are not all paid out as dividends immediately. (If all profits are paid out as dividends, the benefit shrinks due to the second tax on dividends – but even then, qualified dividends are often taxed at 15% which may be lower than high ordinary income rates.)
No Self-Employment Tax on Dividends – Owners of an LLC taxed as a partnership or disregarded entity must pay self-employment tax (15.3% Social Security/Medicare) on the business’s net income (with some exceptions for certain passive owners). In a C Corp scenario, an owner’s share of the profit is not automatically hit with self-employment tax because profits are taxed at the entity level, and any distributions come out as dividends (which are not subject to Social Security/Medicare taxes). If the owner also takes a salary, that salary is subject to payroll taxes, but any remaining profit paid as a dividend avoids those particular taxes. This can sometimes save money compared to an LLC/partnership where all earnings are subject to SE tax. (An S Corp election is another way to achieve this benefit on pass-through basis, but with its own restrictions.)
Access to Certain Deductions/Fringe Benefits – C Corporations have some tax advantages in deducting owner benefits that LLCs (as pass-throughs) might not. For example, a C Corp can fully deduct health insurance premiums for employee-owners and offer other fringe benefits (like certain life insurance or childcare benefits) that are tax-free to employees but deductible to the corporation. In an LLC taxed as a partnership, if the LLC pays for the owner’s health insurance, the owner generally still has to include those in income (or at least is not getting a tax-free benefit) unless structured carefully. Also, C Corps can potentially deduct charitable contributions up to a limit and carry them forward (whereas for pass-through, charitable contributions are just itemized on the owner’s return subject to personal limits). If those benefits are valuable, being a C Corp for tax might help.
Attracting Investors – Some investors, particularly venture capital, prefer or even require a C Corporation (often a Delaware C Corp) structure. While serious investors might want you to actually be a corporation legally, an LLC taxed as a C Corp could serve in some cases as an interim solution if you needed the corporate tax structure for a period. Also, foreign or corporate investors cannot invest in an S Corp (S Corps are limited to 100 shareholders, all U.S. persons, and no corporations as owners). But they can invest in an LLC. If that LLC is taxed as a C Corp, you can accommodate investors who themselves might be entities or foreigners, while maintaining LLC flexibility in the operating agreement. Note, if you’re going down the venture path, converting the LLC to a corporation might eventually be necessary, but the tax status change could be a stepping stone.
Credibility and 1099 Exemption – This is more minor, but some businesses feel that being taxed as a corporation adds credibility when dealing with certain clients or agencies. Also, by being taxed as a C Corp, your LLC might avoid some administrative hassles: for instance, other businesses generally do not have to issue a 1099-NEC for payments made to corporations. If your LLC is taxed as a C Corp, once you let clients know that (usually by providing a Form W-9 indicating you are a C Corp), they might not need to send you 1099 forms each year for services. (Note: this is a small perk and should not drive the decision, but it’s a slight reduction in paperwork.)

In summary, the main appeal of an LLC electing C Corp status is often tax planning flexibility – especially for those wanting to keep money in the business for growth or potentially lower their immediate tax bill on high earnings – and alignment with certain business goals like accommodating investors or benefiting from corporate-style deductions.

However, these benefits come with trade-offs. It’s time to look at the drawbacks and what to be careful about.

Common Pitfalls and Things to Avoid

Electing to have your LLC taxed as a C Corp is not a one-size-fits-all solution, and it can backfire if not done or used properly. Here are key drawbacks, pitfalls, and mistakes to avoid:

Double Taxation (The Big One): The flip side of the C Corp mode is that if you want to take profits out of the company, those profits will have been taxed at 21% at the entity level and then again on your personal return as dividends (typically at 15% or so). Combined, that can be a higher tax hit than if you were just taxed once on the earnings. Avoid assuming that 21% is your only tax — remember to account for shareholder-level taxes on distributions. For small businesses where the owner needs to withdraw most or all profits for living expenses, C Corp status usually means paying more tax overall than a pass-through LLC or S Corp would. In such cases, electing to be taxed as a C Corp can be a costly mistake.
No Personal Tax Deduction for Losses: In the early years of a startup or a business with fluctuating income, being able to deduct business losses on your personal return can be valuable. A default LLC (pass-through) allows that — losses flow through to the owners (with some limitations) and can offset other income in certain cases. But if your LLC is taxed as a C Corp, any net operating losses stay in the corporation; the owners cannot use those losses on their personal taxes. The corporation can carry its losses forward to offset future corporate profits, but if the business never becomes profitable or you shut it down, those losses might never benefit the owners’ personal taxes. Avoid electing C Corp status if you expect significant initial losses that you’d want to use personally.
Complexity and Compliance Costs: Running a C Corp (even if it’s an LLC in legal form) is more complex. You have to file a separate tax return (Form 1120) and possibly engage a CPA to do corporate accounting. Payroll might become necessary for owners who work in the business (to take advantage of deductions or just to get money out in a tax-favored way). You may deal with issuing 1099-DIV forms for dividends. All of this can mean higher accounting fees and more administrative work. Avoid this election if you’re not prepared for additional paperwork and professional tax preparation.
Accumulated Earnings Tax (AET): While retaining earnings in the corporation can be a benefit, the IRS sets a trap for companies that stockpile too much cash without a reasonable business need. The Accumulated Earnings Tax is a penalty tax (currently 20%) on retained earnings beyond a certain threshold (generally $250,000 for most companies) if the IRS determines you retained earnings just to let shareholders avoid dividend taxes. If you plan to keep profits in the LLC-turned-C-corp for the long haul, ensure you have documented plans (expansion, equipment purchases, etc.) to justify the accumulation. Avoid letting large sums pile up idle solely for tax avoidance, or you could get hit with AET.
Reasonable Compensation Issue: If you’re an owner-employee of the LLC taxed as a C Corp, you might think to minimize double tax by taking a low salary (to leave profits taxed at 21%, then perhaps qualified dividends at 15%). However, the IRS expects reasonable compensation for services. If you pay yourself too low a salary and the company has big profits, the IRS could reclassify some of those would-be dividends as wages, hitting you with back payroll taxes (and hitting the company with penalties for not withholding). Conversely, paying an excessively high salary to wipe out profits (to avoid corporate tax) can also draw IRS scrutiny – the IRS can deny deduction of unreasonable compensation, re-characterizing it as a dividend. Avoid extremes; work with a tax advisor to set a fair salary if you go the C Corp route.
Lock-In Effect and Exit Strategy: Once you elect corporate taxation, switching back is not immediate. As noted, IRS rules generally lock your classification choice for 60 months. Even if you could switch sooner, converting an entity’s tax status can have tax consequences. For instance, if after being a C Corp you wanted to revert to partnership status, it might be treated as a liquidation of the corporation – meaning potentially taxable gains if the company’s assets appreciated. Likewise, if you plan to convert your LLC to a corporation legally (say you plan to incorporate as a Delaware C Corp for investors), the interim period where the LLC was taxed as a C Corp might complicate that conversion or at least involve careful tax planning to avoid a taxable event. Avoid electing C Corp without thinking 2-3 steps ahead about your long-term entity plans.
State Tax Surprises: We talked about state nuances; a pitfall is neglecting them. If your state has high corporate taxes or additional franchise taxes on corporations, you might end up with a heavier state tax burden than expected. For example, in some states a small LLC might pay minimal taxes as a pass-through, but as a C Corp it could owe a minimum franchise tax or be subject to higher combined state and local corporate rates. Avoid ignoring the local impact – always evaluate the state tax cost of being a C Corp versus remaining a pass-through.
Inappropriate for Low Profits: If your LLC’s profits are modest, the advantages of the 21% rate or other perks diminish, while the fixed costs (accounting, franchise taxes, etc.) remain. For a one-person consulting LLC making $50k, being a C Corp would likely increase tax and paperwork with no real benefit. Avoid C Corp election unless there is a clear financial or strategic reason; many small businesses are better off staying as pass-through (or at most electing S Corp if seeking some payroll tax savings).
Miscommunication or Misclassification: Sometimes banks, clients, or even the IRS might get confused by an LLC taxed as a corporation, because legally your company is an LLC, but tax-wise it’s a corp. You have to be careful when filling out forms (like the W-9 form mentioned earlier: you should indicate you are a corporation for tax purposes). Avoid confusion by clearly communicating your tax status to accountants and relevant parties. Ensure your EIN is properly associated with the corporate tax status at IRS so that, for example, IRS expects a Form 1120 from you, not a Form 1065 or nothing. Mistakes in IRS records can happen during the transition, so follow up if you don’t get confirmation of your election.

Bottom line: There are very real downsides to C Corp taxation for an LLC, particularly for small businesses. Always weigh the ongoing double taxation cost and compliance burden against the potential benefits. If in doubt, consult a tax professional who can model the tax outcomes for your specific situation before you make the leap.

Comparisons: LLC Taxed as C Corp vs Other Structures

To put things in perspective, let’s compare an LLC taxed as a C Corp with the other common tax setups side by side. The table below outlines the most common scenarios:

Business Structure & Tax Status	Tax Forms & Filing	Taxation Type	Key Points
Single-Member LLC (default tax)	No separate business return (income on Schedule C of owner’s Form 1040)	Pass-through (disregarded entity)	The LLC is ignored for tax. Owner pays self-employment tax on profits; all profits taxed at owner’s individual rate. Simplicity, but no separate business tax identity.
Multi-Member LLC (default tax)	Form 1065 partnership return; Schedule K-1s to owners	Pass-through (partnership)	The LLC files an informational return. No tax at entity level; members pay tax on their share. Profits may be subject to self-employment tax for active members. Flexible profit allocation (per operating agreement) is allowed.
LLC electing S Corp (tax status)	Form 1120S S-Corporation return; Schedule K-1s to owners	Pass-through (S corporation)	The LLC is treated like an S Corp. No tax at entity level (generally). Owners must be paid “reasonable” salaries (subject to payroll tax), remaining profit passes to owners without self-employment tax. Limitations: must meet S Corp criteria (≤100 owners, U.S. individuals, one class of stock, etc.). Common for small businesses to save on self-employment tax, but involves payroll and stricter rules.
LLC electing C Corp (tax status)	Form 1120 corporate return; Form 1099-DIV to owners for dividends (if any)	Double taxation (C corporation)	The LLC is treated as a C Corp for tax. Pays 21% federal tax on profits. Owners are shareholders, not automatically taxed on profits unless paid out. Dividends (or distributions) to owners taxed at dividend rates. Owners can be employees drawing salaries (deductible to company). Good for reinvestment and potential tax deferral; risk of double tax if profits are distributed.
Traditional C Corporation (Inc., default tax)	Form 1120 corporate return; 1099-DIV for dividends	Double taxation (C corporation)	A standard corporation legally, taxed under subchapter C. Identical tax treatment to an LLC electing C Corp: 21% corporate tax, dividends taxable to shareholders. Legally distinct entity with corporate formalities. Often chosen for companies seeking investors, going public, etc. In tax terms, no difference from an LLC taxed as C Corp, except how legal structure might be governed under state law.

As the table shows, an LLC taxed as a C Corp is tax-equivalent to a regular C corporation, and very different from the pass-through taxation it would otherwise have. It’s worth comparing an example scenario to illustrate these differences in actual numbers.

Detailed Examples

Let’s work through a simplified example to see how the numbers might play out in different tax setups.

Example 1: Profitable LLC considering C Corp Election

Scenario: Jane owns a consulting business structured as a single-member LLC. The business nets about $150,000 in profit per year. Jane is trying to decide how to be taxed.

As a default single-member LLC (disregarded): Jane reports $150k as business income on her Schedule C. Assume her marginal federal tax rate is 24%. She would pay roughly $36,000 in federal income tax on that profit. Additionally, she owes self-employment tax (~15.3%) on the $150k, which is about $22,950 (though she gets to deduct half of that on her income tax). After all federal taxes, she might pay around $36k + $22.95k ≈ $58,950. (Self-employment tax covers Social Security and Medicare, so it’s not “wasted” money, but it’s a cash cost.) Her effective tax rate in this scenario is quite high on that income. The LLC itself pays nothing, because it’s just Jane.
As an LLC electing S Corp: Suppose Jane elects S corporation status for her LLC. She chooses to pay herself a salary of $80,000 and the remaining $70,000 will be pass-through profit. The LLC (as S Corp) deducts her salary as an expense, leaving $70k taxable to her as business profit. She pays herself via payroll, so on $80k salary she and the company split the payroll taxes (~$12,240 in Social Security/Medicare total). She pays income tax on both the salary and the pass-through profit (still roughly $150k total income for tax, so ~$36k in income tax at 24%). However, the big savings is that the $70k pass-through portion is not subject to self-employment tax (because S corp profit isn’t, only the salary was). So, in this scenario total tax might be ~$36k income tax + $12.2k payroll tax ≈ $48,200. This saves her around $10k compared to default status, primarily due to avoiding SE tax on $70k. This is why S Corps are popular for many small businesses.
As an LLC electing C Corp: Now consider if Jane’s LLC is taxed as a C Corp. The company pays 21% corporate tax on $150k profit = $31,500. Jane can decide how to get money out. If she doesn’t need all the money, she might take a modest salary for her work and leave some profit in the company. Say she takes a $80,000 salary (similar to the S corp scenario). The company’s profit after that salary would be $70,000 (just like the S corp had). Corporate tax on $70k is $14,700. Jane’s salary is taxed to her personally ($80k at 24% → $19,200 income tax) and payroll taxes ($12,240 split between Jane and the company, similar to before). Now, after paying $14.7k corporate tax, the company has $55,300 post-tax profit left. If Jane leaves it in the company, she pays no further tax personally on it this year. Her personal tax was $19.2k + her portion of payroll tax (~$6,120), totaling about $25,320. The company paid $14.7k corporate tax (plus it paid the other $6,120 of payroll tax). So combined immediate tax is roughly $25.3k (Jane personal + her half of payroll) + $14.7k (corp) + $6.1k (corp payroll) ≈ $46,120. That’s a bit less than the S Corp scenario for now. The catch is the company still has $55k sitting, which if Jane takes out as a dividend later, she’ll pay 15% on. 15% of $55k is $8,250. If she did that same year, the total becomes $46,120 + $8,250 ≈ $54,370. That ends up somewhat in between the S Corp and sole proprietor outcomes. If she doesn’t take it out this year, her current year tax is lower and she can defer the $8k tax maybe for a future year.

This example shows that an LLC taxed as a C Corp can yield tax savings in the short term (here, slightly lower than even the S corp in immediate tax) especially if not all earnings are distributed. But one must consider eventual taxes on dividends. S Corp was more efficient here because it got rid of the corporate tax entirely. The C Corp route gave some deferral advantage.

Example 2: Small LLC with Minimal Profit

Scenario: Tom runs a side business through an LLC making $30,000 profit a year. He’s considering tax elections.

If Tom is a default LLC (sole proprietor), he just pays tax on $30k (say 12% bracket = $3,600) plus self-employment tax (~$4,590). Total around $8,190.
As an S Corp, maybe he pays himself $20k salary and $10k as profit. Payroll taxes on $20k ~$3,060, income tax on $30k ~$3,600, total ~$6,660.
As a C Corp, the company would pay 21% on $30k = $6,300 corporate tax if he left it all in. If he wants that money, either as salary or dividend:
- If salary all $30k: that would zero out corp profit (so corp tax ~$0), he pays income tax $3,600 + payroll taxes ~$4,590 (split employer/employee). That totals ~$8,190 (same as sole prop actually, because he essentially replicated the sole prop but with more hassle).
- If he takes no salary and pays it as dividend: corp tax $6,300, remaining $23,700 dividend taxed at 15% = $3,555. Total ~$9,855. That’s worse than doing nothing or S corp.

For Tom, clearly electing C Corp is not beneficial; the scale is too small to overcome the double tax and compliance costs. The S Corp saves a bit in this scenario; the C Corp route adds tax.

These examples are simplified (they don’t include state taxes, assume certain tax brackets, and ignore some nuances) but they illustrate that the benefits of C Corp taxation tend to appear in higher income scenarios or when a lot of profit can stay in the business. For lower incomes or when all profit is needed by the owner, pass-through (or S corp) tends to be better.

Conclusion: Weighing Your Options

So, can an LLC be taxed as a C Corp? Absolutely yes – the IRS allows it, and it can be a powerful tool in the right circumstances. However, it is a decision that should be made with full awareness of the consequences. We’ve seen that:

The federal tax laws provide a mechanism (Form 8832) for LLCs to elect corporate taxation, and most states will honor that classification for state tax.
Electing C Corp status can offer benefits like a lower flat tax rate on reinvested profits, avoidance of self-employment tax on those profits, and potential tax-deferral or planning opportunities for growing businesses.
On the flip side, it introduces the complexity of double taxation, additional paperwork, and the need for careful tax planning (reasonable salaries, avoiding trapped losses, etc.).
Many small LLCs find that remaining a pass-through (or choosing S Corp status if eligible) results in less tax and hassle. C Corp taxation is more often beneficial for larger businesses or specific scenarios (like having foreign owners or plans to scale up significantly).

In the end, the choice should hinge on an analysis of the numbers and your business goals. Consider consulting a CPA or tax attorney who can model different scenarios for your LLC: sometimes the math holds a clear answer. And remember, tax laws can change (rates might shift, new rules can appear), so what’s advantageous today might not be forever.

The key is that you have the choice. An LLC’s flexibility is one of its greatest strengths — you can start as a simple pass-through and, if circumstances warrant, elect C Corp status down the line (or even S Corp). But once you do, you step into the corporate tax world with all its pros and cons. So choose wisely.

FAQs

Can a single-member LLC elect to be taxed as a C Corp? – Yes. A single-member LLC can file IRS Form 8832 to choose corporate tax status. It will then be taxed as a C Corp (while remaining an LLC).

Does electing C Corp taxation change the legal status of my LLC? – No. The LLC stays an LLC legally. The election only changes its tax status with the IRS (and state tax authorities), not its legal entity type.

How often can an LLC change its tax classification? – Not frequently. Once you elect corporate status, generally you must stick with it for 5 years before changing again (absent special IRS permission).

Do I still need to pay the $800 LLC fee in California if my LLC is taxed as a C Corp? – Yes. California charges LLCs an $800 annual franchise tax regardless of federal tax status. Even if your LLC is taxed as a corporation, it owes the $800 fee each year in CA.

Which is better for a small business: LLC taxed as S Corp or as C Corp? – Usually S Corp. Most small businesses save more tax with S Corp status (avoiding corporate tax and reducing self-employment tax). C Corp status makes sense mainly for high-profit or ineligible-for-S-corp situations.

Do LLCs taxed as C Corps issue K-1s to their owners? – No. K-1s are only for pass-through entities. An LLC taxed as a C Corp issues no K-1s. Owners get 1099-DIV forms for dividends and W-2s for any salaries paid.

Is it difficult to file taxes for an LLC taxed as a C Corp? – It’s more involved. You have to file a corporate return (Form 1120), manage payroll and accrual accounting. Not necessarily difficult, but it’s a higher compliance burden often handled with a CPA’s help.

If my LLC is taxed as a C Corp, can I later convert my business into a corporation legally? – Yes. You can later form or convert into a corporation under state law. Since you’re already taxed as a C Corp, that legal conversion is feasible. Just get professional guidance to ensure it’s done tax-efficiently.

Does an LLC taxed as a C Corp qualify for the 21% corporate tax on all profits? – Yes. An LLC taxed as a C Corp pays the flat 21% federal corporate tax rate on its taxable income (just like any regular C Corp). State corporate taxes may also apply.

What happens if I don’t formally elect but I start filing as a corporation anyway? – It can cause trouble. If you file a corporate return without Form 8832, the IRS may reject it or penalize you. Always file the election first. If you forgot, seek professional help to fix it.