Disadvantages Of An LLC

While LLCs have many advantages, they also have disadvantages in comparison to a corporation. The profits from an LLC are required to pay Social Security and Medicare taxes. It is possible that LLC owners could have to pay more taxes than the owners of a corporation. LLC profits and salaries have to pay self-employment taxes that are, at present, equal to a combined 15.3%. In the case of a corporation, just salaries (and not profits) have to pay those taxes. An owner who has a salary of less than $102,000 is the most disadvantaged. Profits must be recognized immediately by owners of an LLC. Profits from a C corporation do not have to be immediately distributed as dividends to the shareholders. So, C corporation shareholders are not always taxed on the profits of the corporation. Since LLCs do not face double taxation, its profits must always be recognized in the income of a member. An LLC does not have as many fringe benefits as a corporation. LLC employees who are party to benefits like group health insurance, medical reimbursement plans, parking plans, etc., are required to treat those benefits as taxable income. This is also pertinent to employees who hold more than 2% of an S corporation. On the contrary, employees of a C corporation do not have to report these fringe benefits as taxable income.