LLC or C Corp ?

Question

We currently have an LLC with 4 members. No member has taken a salary. Result = having to pay taxes out of pocket. Rules dictate that you cannot pay the member taxes using LLC funds.

The Question is... Should we change to C Corp. or keep it an LLC ?

Ashish Acharya · Answer

Hey @James Klein, you've gotten some good answers so far. I really liked the creativity of Ken's above. But here's my answer from a tax perspective, and assuming the LLC is an S-Corp. If you and the other members are active in the business, the IRS expects you to take reasonable salaries as W-2 wages. Skipping that can cause compliance issues and make taxes feel heavier since nothing’s been withheld through payroll.

You’re also right that the LLC can’t pay your personal taxes directly, but it can make owner distributions so you have the cash to cover them — just make sure they’re proportional to ownership.

As for switching to a C-Corp, that usually leads to double taxation unless you’re planning to reinvest all profits back into the business. For most small businesses, it makes more sense to stay an S-Corp and fix the salary issue instead of changing structures. Happy to connect.

Basit Siddiqi · Answer

A C or S Corporation may save on self-employment taxes. However, it is best to have a conversation with an accountant before doing so.Furthermore, in practice, I seen LLC's issue a distribution around March of every year to its members to pay for taxes. It really depends on what the LLC documents say.It depends on if the LLC is in a growth phase and its members argue tha the cash would be in better hands in the LLC so the business can grow.Best of luck!

Jason Malabute · Answer

Hey James — great question, but to be honest, it’s tough to give solid advice without digging deeper into your specific situation.

You really need to run a proper entity analysis and compare the tax  implications of staying an LLC versus switching to an S Corp or a C Corp. Each structure has pros and cons depending on your income levels, business goals, reinvestment strategy, and whether or not you plan to distribute profits.

One of the key benefits of a C Corporation is the flat federal tax rate, which can be very attractive if you and your partners are in high personal tax brackets — especially if you’re planning to reinvest profits back into the business rather than distribute them immediately.

That said, a C Corp also comes with its own downsides, like potential double taxation if you’re taking dividends. It’s best to model the tax outcomes for each scenario before making any decisions.

Jason Malabute · Answer

That’s not really enough info to give meaningful feedback. We don’t know what type of business this is, what the members’ plans are for the money, or their overall income levels/tax brackets, goals, other income sources, etc . Those details can make a big difference in whether staying as an LLC or changing to a C corp makes sense. Could you share a bit more about that?

Aaron Zimmerman · Answer

LLCs taxed as partnerships (1065 return) don't have salaries to their members. They'd be guaranteed payments.

What is the activity that is in the LLC?