Pass-through vs. C-Corporation Taxation
There are often many reasons why the owners of LLCs may wish to choose pass-through taxation (disregarding the entity) after forming the LLC. What comes to mind first is that the company is expected to take initial losses and the owners may want to use those losses on their personal tax returns. Another reason may be the ease of reporting in that the LLC is not required to file a tax return.
A word of caution is in order, however, regarding this choice. Generally speaking, the owners and officers of corporations and LLCs that are taxed as corporations are not personally liable for the company’s income taxes. That is not true, however, where the selection is made for pass-through taxation. We have observed situations where an owner has not elected to be taxed as a corporation, and was bewildered when, after allowing his company to become indebted for taxes, liens were placed on his residence by taxing authorities, or his personal bank account was levied.
Although there may be many instances where pass-through taxation is a preferred method to C-Corporation taxation, there are negatives such as that set forth above that must also be considered. We always believe that one should obtain professional advice prior to electing a taxing method for a new entity.
