LLC vs C-Corp Taxes: Double Taxation Explained

The biggest difference between an LLC and a C-corporation is how they are taxed. An LLC is usually taxed once, on the owners' own returns. A C-corporation can be taxed twice, once on the company's profit and again on what it pays its shareholders. This guide explains that clearly, with a simple example, and covers what it means for a founder who lives outside the US. For the wider choice, see our LLC vs C-Corp comparison.

How an LLC is taxed

By default, the IRS does not tax an LLC itself. It treats it as a pass-through:

• A single-member LLC is ignored for income tax, so its profit is reported on the owner's return.
• An LLC with two or more members is treated as a partnership. It files a partnership return, and each member reports their share.

So the profit is taxed once, at the owner's level. An LLC can also choose to be taxed as a corporation, which changes the picture below. See IRS Form 8832.

How a C-corporation is taxed

A C-corporation is a separate taxpayer. It pays federal corporate income tax on its profit, at a flat rate set by Congress (21% at the time of writing, though rates can change). It files its own return, Form 1120.

What double taxation means

When the corporation pays out its profit to shareholders as a dividend, the shareholders are taxed on it too. The same profit is therefore taxed twice: once in the company, and again in the shareholder's hands. A simple example:

1. The corporation earns a profit and pays corporate tax on it.
2. What is left can stay in the company, or be paid out as a dividend.
3. If it is paid out, the shareholder reports the dividend and pays tax on it as well.

If the company keeps the profit and reinvests it, there is no second tax at that point. That is why a C-corporation can suit a company that grows by reinvesting, and a pass-through LLC can suit one that pays its owners out.

What it means if you live outside the US

• LLC owned by a non-resident. A single-member LLC with a foreign owner and no US-source income generally owes no US income tax, but it files a yearly information return (Form 5472 with a pro forma Form 1120). Missing it is penalised. Your home country may tax the profit too. See US LLC tax filing.
• C-corporation owned by a non-resident. The corporation pays US corporate tax on its profit. Dividends it pays to a foreign shareholder are generally subject to US withholding tax at a statutory rate of 30%, which a tax treaty may reduce. A foreign-owned corporation also has its own IRS reporting.

Which is cheaper depends on where you live, the treaty between your country and the US, and whether you pay profit out or keep it in the company. Ask an accountant who knows both countries before you decide.

Where an S-corporation fits

An S-corporation is a tax status that avoids the double tax: profit passes through to the owners. But it is only open to US citizens and residents, so a non-resident owner cannot use it. An LLC can elect it using Form 2553, if the owners qualify.

Quick comparison

Frequently asked questions

Is a C-corporation always taxed more?

No. If the company keeps its profit, it is taxed once at the company level. The double tax arises when profit is paid out as dividends.

Does an LLC avoid all US tax?

A foreign-owned LLC with no US income generally owes no US income tax, but it still has IRS filings, and your own country may tax the profit.

Can I change later?

Yes. An LLC can elect to be taxed as a corporation, or convert to one. Read how to convert an LLC to a C-corp. Plan the tax effect with an accountant first.

This is general information, not legal, tax or financial advice. Tax rates and rules change, so confirm them with a qualified accountant and on the IRS website.

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