Single Taxation Versus Double Taxation and the Iowa LLC

As discussed in this prior post, Iowa Limited Liability Companies have the benefit of electing to have a single layer of tax.

imagesWhen an LLC chooses a single layer of tax, LLCs are taxed as pass-through entities, meaning all earnings pass through to its members (i.e. owners) in the year they are earned and are not taxed at the corporatelevel. Comparatively, in a traditional corporation, the corporation is taxed on earnings and then its shareholders (i.e. owners) are taxed on any dividends when distributed – often referred to as double taxation.

For demonstration purposes, the following example helps illustrate the difference.

Assume ABC Entity, a new small business, sells 100,000 widgets for a net taxable income of $100,000. Assume that the tax rate for corporations on this income is 20 percent, and the personal income tax rate for the owner is 25 percent. ABC Entity and its owner would pay the taxes shown on the following table.

Corporation LLC Electing Pass-Through Taxation
Corporate Net Income (Revenue-Costs)  $100,000  $100,000
Corporate Tax @ 20%  $20,000  N/A
Income Available To Distribute  $80,000  $100,000
Dividend Taxes @ 15%  $12,000  N/A
Personal Income Tax @ 25%  N/A  $25,000
Earnings After Taxes  $68,000  $75,000

Pass-through taxation can have significant advantages for small-business owners. In this hypothetical, ABC Entity’s owner would save approximately $7,000 in taxes. Actual results will vary depending on, among other items, the size of the business, the owner’s other income, the marginal tax rates of the corporation and owner.

About Matthew McKinney

Attorney focused on civil and commercial litigation.
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