Quiz: LLCs, S-Corps, and C-Corps

1. A single-member LLC is taxed by default as:

A corporationA disregarded entity (income flows to the owner's personal return)A partnershipA tax-exempt organization

A single-member LLC is a 'disregarded entity' for tax purposes. The IRS ignores it and all income/expenses flow through to the owner's personal 1040 on Schedule C or Schedule E. The LLC still provides liability protection despite this pass-through treatment.

2. The main advantage of an S-Corp election for a profitable business is:

Unlimited shareholders allowedSplitting income between salary (subject to payroll tax) and distributions (not subject to payroll tax)No annual filing requirementsDouble taxation of profits

An S-Corp lets you pay yourself a reasonable salary (subject to 15.3% self-employment tax) and take remaining profits as distributions (not subject to SE tax). At higher income levels, this can save thousands annually in payroll taxes.

3. Double taxation in a C-Corp means:

The company pays state and federal taxesThe corporation pays tax on profits, then shareholders pay tax again on dividends receivedEmployees are taxed twice on their wagesThe company pays double the normal tax rate

C-Corps pay corporate income tax (21% federal) on profits. When those after-tax profits are distributed as dividends, shareholders pay personal income tax on the same money. The same dollar of earnings is taxed at both the corporate and individual level.

4. For a real estate investor holding 5 rental properties, the most common entity structure is:

One C-Corporation holding all propertiesA series LLC or individual LLCs for each propertyA general partnership with no written agreementHolding all properties in personal name

LLCs provide pass-through taxation (avoiding double taxation) and liability protection. Using separate LLCs (or a series LLC where available) isolates each property's liability from the others, so one lawsuit cannot jeopardize the entire portfolio.

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