Nevada LLC vs. Corporation: Tax Benefits Compared

Nevada allows new and seasoned business owners to open LLCs and corporations in the state. This opportunity gives entrepreneurs different benefits, including no state income and franchise taxes. But when it comes to general taxation, Nevada LLCs and corporations face different implications and liabilities.

To help you choose between these two business structures, NCH’s tax experts have discussed their tax benefits below.

Key Takeaways

• Nevada LLCs use pass-through taxation, avoiding the double taxation that corporations face.
• LLCs can also choose how they’ll be taxed and deduct different business expenses.
• If a corporation has subsidiaries, it can file only one tax return for those companies.
• A C corporation’s earnings can be non-taxable for its owners. Moreover, the business is subject to a low corporate income tax rate of 21% and can write off employee benefits.
• S corporations help its owners save on self-employment taxes that are usually imposed on LLC members. Their losses can be tax-deductible as well.

The Tax Advantages of Nevada LLCs

When you form and operate a Nevada LLC, you gain the following tax advantages.

Pass-Through Taxation

Nevada LLCs are pass-through entities by default. As a result, their owners don’t pay federal corporate income taxes. A Nevada LLC’s profits and losses are reported on its owner’s personal tax return, helping the business avoid double taxation. (Double taxation means that a company is taxed once at the corporate level and again at the personal level.) 

Pass-through taxation offers several benefits to entrepreneurs, including simpler tax filing and potential savings since LLC owners are only taxed once. You can learn more about these advantages in NCH’s guide to pass-through and corporate taxation.

Tax Classification Elections

A Nevada LLC can also choose how it wants to be taxed. It can elect any of the following tax classifications.

• Disregarded entity (an LLC taxed as a sole proprietorship) – Single-member LLCs are generally treated as “disregarded entities” for federal tax purposes. In other words, they’re considered part of their owners’ personal income tax returns.
• Partnership – Domestic LLCs with two or more members are taxed as partnerships.
• S corporation – LLCs with S corporation tax status use pass-through taxation. Their profits, losses, deductions, and credits are distributed to shareholders, with the flow-through reported on personal income tax returns.
• C corporation – LLCs taxed as C corporations are subject to a 21% federal corporate tax rate.

Related Resource

Learn the differences between LLCs and S corporations from NCH’s blog.

Business Expense Deductions

Finally, Nevada LLC owners can write off certain expenses from their taxable income.

If you’ve just launched an LLC, you can write off its startup costs. These expenses are the costs you’ve incurred before and after opening your business. Examples of startup costs include advertising and marketing expenses, employee training and development costs, and travel expenses.

Over time, you can deduct other kinds of business expenses from your taxable income. The costs of corporate equipment, Internet services, business meals, accounting, office space, and more are considered tax-deductible expenses.

The Tax Advantages of Nevada Corporations

A different set of tax advantages come with Nevada corporations. In this section, we’ll discuss the general tax benefits of starting these businesses and those for C corporations and S corporations.

General Tax Benefits

When paying business taxes, corporations operating as a “parent company” can file only one tax return for its subsidiaries. (The rule can also apply to series LLCs with an umbrella LLC and multiple entities.) Ultimately, a parent corporation offsets the losses of some subsidiaries against the profits of others. The result is a lower tax bill for the business.

The Tax Advantages of C Corporations

Once a C corporation generates profits, it can retain those earnings without the owners paying taxes on them.

A C corporation’s profits remain subject to corporate income tax, but they don’t increase a shareholder’s personal income tax obligations. This scenario only happens when the shareholder receives dividends or capital gains out of the C corporation’s earnings. And, as we mentioned earlier, C corporations have a lower corporate tax rate of 21%. It’s beneficial for businesses pursuing growth.

Finally, C corporations can deduct employee benefits, including health insurance premiums and retirement plan contributions.

The Tax Advantages of S Corporations

Like LLCs, S corporations avoid double taxation with a pass-through tax structure. However, they allow shareholders to save on self-employment taxes imposed on LLC owners. These taxes apply to an individual’s net earnings, covering Social Security and Medicare contributions.

Another tax benefit of S corporations is that their losses can be deducted from a shareholder’s personal income tax return. As a result, their tax liability decreases, easing the burden of financial losses.

Nevada LLC vs. Corporation: Tax-Related Disadvantages

While Nevada LLCs and corporations offer potential tax benefits, choosing one over the other can negatively impact your tax liability.

If you decide to form and run an LLC, you’ll be subject to self-employment tax on your net earnings. The current self-employment tax rate stands at 15.3%. However, Nevada LLCs can elect to be taxed as a S corporation, letting you save on self-employment tax.

For S corporations (or LLCs taxed as these businesses), they can pay owner-employees a reasonable salary for their services. Payroll taxes are imposed on this amount, although additional profits aren’t subject to self-employment taxes.

Finally, C corporations face double taxation. When business dividends are distributed to shareholders, they’re subject to personal income taxes.

Related Resource

Learn the differences between corporations and LLCs from NCH’s quick video guide.

Frequently Asked Questions

What are the main tax differences between Nevada LLCs & corporations?

Nevada LLCs are pass-through entities by default. Essentially, their profits and losses flow through to their owners’ personal tax returns.

Nevada C corporations can face double taxation. They’re taxed once at the corporate level and again at the taxpayer level. As for S corporations, these businesses are pass-through entities, just like LLCs.

Can a Nevada LLC elect to be taxed as an S Corporation?

Yes, Nevada LLCs can elect to be taxed as an S corporation.

The S corporation election can help LLC owners save on-employment taxes by taking reasonable salaries. These wages are subject to payroll taxes, although additional distributions aren’t subject to self-employment taxes.

Which business structure comes with lower compliance costs?

Nevada LLCs come with lower compliance costs because they’re not required to follow federal prerequisites governing corporations. LLCs only file an Annual List of Managers or Members and renew their state business licenses annually.

On the other hand, corporations are mandated to hold annual meetings, maintain detailed records, and create board resolutions.

How does Nevada’s lack of state income tax affect both structures?

Nevada’s lack of state income tax benefits LLCs and corporations.

Since these businesses aren’t taxed at the state level, their owners can focus on reducing their tax burden. Plus, they can spend more time on business operations.

When should a growing LLC convert into a corporation?

A growing LLC should convert into a corporation if:

• It gets a venture capital term sheet.
• It’s preparing for an initial public offering (IPO) within two years.
• A public company that pursues a corporate structure wants to acquire the LLC.
• Key staff members or job candidates seek stock options.
• A potential investor’s requirements necessitate change.

Are Nevada corporations attractive to potential investors?

Yes, Nevada corporations are attractive to potential investors. That’s because these businesses can issue multiple classes of stock and operate with a clearer ownership structure. LLCs can raise capital and issue shares, but both aren’t enough to attract investors.

How are LLCs & corporations taxed?

LLCs can be taxed as disregarded entities, partnerships, or corporations. Their profits and losses are reported on the owner’s personal income tax return. Moreover, LLC owners are subject to self-employment tax on their net earnings.

If you run a C corporation, you face double taxation. The business is taxed once at the corporate level and again at the personal level.

Can Nevada LLCs & corporations help reduce personal liability?

Yes, Nevada LLCs and corporations can help reduce personal liability. Both entities offer limited liability protection and asset protection that must be maintained with effective strategies. They include following corporate formalities and avoiding financial commingling (mixing personal funds with business funds).

Which business structure is more flexible: LLCs or corporations?

LLCs are more flexible than corporations. They can change how they’re managed, how profits and losses are distributed to each owner, and who owns the business. Also, LLC operating agreements can grant voting rights to selected members.

Conversely, corporations have a board of directors, officers, and voting shareholders. They must meet statutory requirements as well.

How are the losses of LLCs & corporations treated for tax purposes?

The losses of LLCs are usually passed through to their owners’ personal income tax returns. But in S corporations, shareholders can write off their share of corporate losses from their taxable income. The deduction can help minimize their tax liability.

Expert Tips From NCH

1. Consider your long-term plan for your business before choosing between LLCs and corporations. The costs of converting your venture into another entity and complexity of your chosen business structure are most likely to increase after formation.
2. Take self-employment taxes into account as well. Owners of single-member Nevada LLCs pay these taxes on their net earnings.
3. Keep copies of your business’s financial records. These documents will help you justify tax classification elections, maintain liability protection, and attract potential investors.
4. Assess whether your chosen business structure needs to be changed as your operations expand. Use this opportunity to determine how your venture will manage its taxable income moving forward.
5. Consult legal and tax professionals specializing in Nevada’s business laws before making your final decision. Your choice significantly impacts your operations and tax liabilities.

Choose the Best Business Structure for Optimal Taxation

Although Nevada imposes no income and franchise tax on LLCs and corporations, both entities offer different tax advantages. These benefits affect your taxable income and your venture’s operations. Hence, understanding the tax implications of having an LLC or corporation is key to making the best decision for your business.

Do you need help choosing between an LLC and a corporation for taxes? NCH’s tax professionals can discuss your options with you.

Talk to Our Tax Experts Today

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.