Limited liability corporations are known as non-incorporate liabilities and are generally referred to as LLCs. They are individual organizations that are entirely different from their representatives. These businesses shield their members from corporate liabilities. Normally dual taxation takes place if corporations pay tax on the income they gain and members are often taxed after those returns are earned from their members or shareholders. In other terms, taxes are charged both at the corporate and personal level of the member. Moreover, to avoid this double taxation, there exists Internal Revenue regulations and codes which have been adopted by the Internal Revenue Service that regulates the taxation of LLCs as well as the taxation of their members. Under these regulations, an LLC with more than one member is normally taxed the same as a partnership. More so, these companies are treated as tax-paying entities. The taxes are only levied on these companies’ taxable incomes and not on the profits that flow through to the members.
However, an LLC can have some of its members elected to be taxed as a corporation. In such a case, these members receive a flow-through taxation. Such companies are normally classified as flow-through entities. These members are treated separately from the companies. Moreover, the profits and losses are reflected in the member’s income tax returns. The taxes are normally paid after receiving their dividends and in other cases, after selling their stock. Such companies are also taxed as partnerships. Additionally, an LLC that only has a single member is normally taxed as a sole proprietorship. Notably, the LLCs are not usually taxed at an entity level. As a result, this process eliminates the possibility of double taxation on members of an LLC.
Cheeseman, Henry. Legal Environment of Business – Online Commerce, Business Ethics, And Global Issues. 8th ed., Pearson College, 2015.