Utah Contractor Practice Exam

The benefit of having a _______ is that Federal tax is only filed on earnings dispersed to its representatives.

1. Limited Liability Corporation

2. C Corporation

3. Sole Proprietorship

4. All of the above

The correct answer is: Limited Liability Corporation

Having a Limited Liability Corporation (LLC) provides distinct tax advantages, particularly in the context of federal taxation. The primary benefit lies in the pass-through taxation structure that an LLC typically enjoys. This means that the entity itself does not pay federal income tax; instead, the profits and losses are passed through to its members, who then report this income on their personal tax returns. This structure allows for federal taxes to only be paid on the earnings that are actually distributed to the members, rather than on the total earnings of the business. This can result in a significant tax advantage, especially for owners who reinvest their profits back into the LLC rather than taking them as income. In contrast, a C corporation is taxed at both the corporate level and again on dividends when they are distributed to the shareholders, which can lead to double taxation. A sole proprietorship, while simpler in tax reporting, does not provide the limited liability and can leave the owner personally liable for all debts and obligations of the business. Therefore, the benefit of having an LLC relates specifically to its unique tax treatment that favors the taxation only of dispersed earnings, making it an attractive option for many business owners.