If Taxes Rise, Should You Form An LLC or Incorporate? By COLLEEN DEBAISE Why, in this age of ever-increasing personal taxes, do business owners prefer to set up a limited liability company? With an LLC, profits are taxed at individual tax rates. Wouldn't it be better to form a C corporation, where profits are taxed at the corporate rate? -- Don Sutherland, Naples, Fla. Answer: No. In almost all cases, the LLC provides a distinct tax advantage over the C corporation â and that's likely to remain the case, even if individual tax rates do go up. Merl & Hanley accountant Michael Hanley tells Small Business Editor Colleen DeBaise the advantages and disadvantages of LLCs versus other types of companies. When you set your company up as an LLC, profits from the business "pass through" to your personal income tax return, so you're taxed at individual rates, the highest of which is 35% for 2009. When you set your company up as a C corporation, the business is technically a separate entity that pays taxes on its profits at the corporate rate, which starts at 15% for the first $50,000 of income, but can run as high as 39% for 2009. Then you're taxed again â the infamous "double tax" trap â at your individual tax rate when you withdraw some of those profits as a dividend. For that reason, "there's rarely a tax benefit with a C corporation," says Michael T. Hanley, a managing partner with Merl & Hanley in Smithtown, N.Y. In recent years, the LLC has become the entity of choice for most start-ups, largely because it allows pass-through tax treatment while shielding members from personal liability. The management structure of an LLC is also more flexible than that of a corporation, so owners can divvy up operational duties and split income as they see fit, says Alan C. Ederer, an attorney with Westerman Ball Ederer Miller & Sharfstein in Mineola, N.Y. However, the C corporation is often the best choice for business owners seeking venture capital, as its shares are easily transferrable to investors, he says.