Need Accounting Services for Your Business?
Start Your Company
Learn how forming an LLC, an S-Corporation, an C-Corporation, or a Non Profit will impact both your liability and taxation as a business owner.
The LLC or Limited Liability Company is the newest form of business incorporation and is often described as a combination of a corporation and a partnership. Over 80% of small businesses are LLCs and for many good reasons. With fewer requirements and more flexible ownership options than the other entities, LLCs provide business owners with limited liability protection. This means that the company assets are typically owned by the LLC and are separate from the personal assets from that of the LLC owner(s).
One of the most advantageous aspects of the LLC is that it has the ability to choose how it is treated as a taxable entity. According to the IRS, an LLC is, by default, federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single-member LLC). The LLC, however, may elect to be taxed as a C or S corporation at any time the members so choose. This can be useful if the income from your business tends to fluctuate.
LLCs are also flexible with regard to how the owners are paid. For an LLC, if the members choose, the net income/profits of the LLC may be allocated to the members in different proportions to their ownership percentage in the LLC. This is different from a corporation, as corporations are required to distribute profits exactly in accordance with the proportion/percentage of ownership of each shareholder.
Learn more about LLCs here to help decide if that is the proper entity of formation for your business.
An S corporation is a special type of corporation that draws its designation from Subsection S of the tax code. To start an S corporation, a small business owner starts a C corporation, then files a Form 2553.
S-Corps do have more operating requirements and ownership restrictions than an LLC, but they also have significant advantages. One advantage of the S Corporation is that like the LLC it receives pass-through taxation.
Pass-through taxation simply means that federal income tax is not assessed at the entity level; profits are distributed in the form of dividends and flow through to the individual tax returns of the shareholders, and the IRS taxes the shareholders at their individual income tax rate and not at the entity or corporation level. Unlike an LLC, Forming an S Corporation can give you the ability to minimize payroll and self-employment taxes, resulting in significant savings in certain situations.
A C corporation, or C-Corp often just called a generic corporation is the oldest and one of the most common business entities. A C corporation is a completely separate tax and legal entity from its owners.
When you look at all of the requirements placed on C corporations, you might wonder why anyone would form one. The C-Corp does offer several unique benefits. While all business entities can provide fringe benefits to its owners and/or employees, the Corporation allows for a greater range of fringe benefits. Forming a C-Corp is also advantageous to corporate tax treatment and income splitting. The tax rate on corporate income is usually lower than the tax rate on personal income up to the first $75,000 in income. The owners can arrange salaries and bonuses in conjunction with retained corporate earnings to lower their overall tax rate.
Find more details on C-Corporations to help you determine if that is the best type of entity for your new company.
A Non Profit corporation is a corporation whose principal purpose is a public benefit. It provides a shield against potential liability for its directors, officers, and employees. If classified correctly with the IRS, nonprofits are exempt from federal, sales, and property taxes.
Despite this entity's name, a Non-Profit Corporation may generate a profit. Non Profit does not literally mean that your corporation cannot make a profit. A Non-Profit Corporation can acquire more income than it spends on its exempt purpose. This profit can be utilized for operating expenses, including salaries. However, a Nonprofit Corporation may not utilize its income to profit any director or officer.
Learn more about Non-Profit Corporations to help you decide if that designation is best for your organization.