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2024 © USACOREG.comLearn 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 less 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 if 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.
Learn more about S-Corporations here to help decide if that is the proper entity of formation for your business.
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.
Learn more about C-Corporations here to help decide if that is the proper entity of formation for your business.
Not all entity types are created equal, understanding the fundamental differences between each and choosing the right one for your company can alleviate future issues. For individuals that are new to the incorporation process, the LLC can be the ideal choice as it provides limited liability to owners just as a corporation while being less complicated to operate.
PROTECTION
Limited Liability Protection
LLC Yes
LLCs provide personal asset protection, which shields you from being personally liable for business debts.
C-CORP Yes
C Corps provide personal asset protection, which shields you from being personally liable for business debts.
S-CORP Yes
S Corps provide personal asset protection, which shields you from being personally liable for business debts.
NON-PROFIT Yes
Nonprofits provide personal asset protection, which shields you from being personally liable for business debts.
STATE FILING FEES
State formation Fees
LLC Yes
LLCs are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
C-CORP No
C Corps are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
S-CORP Yes
S Corps are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
NON-PROFIT Yes
Nonprofits are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
Ongoing Compilance Fees
LLC Yes
Depending on the state of incorporation, reports and fees may be required.
C-CORP Yes
An annual report and franchise fees are generally due each year along with other reports and fees, which varies depending on the state of incorporation.
S-CORP Yes
An annual report and franchise fees are generally due each year along with other reports and fees, which varies depending on the state of incorporation.
NON-PROFIT Yes
For Nonprofits this varies from state to state.
MANAGING YOUR BUSINESS FEES
Flexible Management Strukture
LLC Yes
LLCs must be member or manager managed according to the terms of the operating agreement.
C-CORP No
C Corps are required to have shareholder elected directors who oversee and elect officers to run the day-to-day operations of the company.
S-CORP No
S Corps are required to have shareholder elected directors who oversee and elect officers to run the day-to-day operations of the company.
NON-PROFIT Yes
Nonprofits are managed by their board of directors following the regulations set forth in their Bylaws.
Adding / Transferring Ownership
LLC Yes
Changes in ownership of an LLC are dependent on the terms of the operating agreement.
C-CORP Yes
Ownership changes in a C Corp are easily made through the sell of stock to new or existing shareholders.
S-CORP Yes
Ownership changes in an S Corp are easily made through the sell of stock to new or existing shareholders.
NON-PROFIT Yes
Nonprofits have no owners.
Ongoing Requirements
LLC Yes
Depending on the state of incorporation, an LLC may be required to file an annual report and/or pay franchise fees.
C-CORP Yes
After formation, C Corps have many ongoing formalities such as writing bylaws, selecting directors, holding initial and annual shareholder meetings, and issuing stock.
S-CORP Yes
After formation, S Corps have many ongoing formalities such as writing bylaws, selecting directors, holding initial and annual shareholder meetings, and issuing stock.
NON-PROFIT Yes
After formation, Nonprofits have many ongoing formalities such as writing bylaws, selecting directors, and seeking tax exempt status.
Ease of Raising Capital
LLC Yes
Depending on the state of LLCs are not allowed to sell stock but may be able to raise capital via bank loans and various other avenues.
C-CORP Yes
C Corps may issue many types of stocks, which may be sold to an unlimited number of shareholders.
S-CORP Yes
S Corps may issue one type of stock, which may be sold to a maximum of 100 shareholders.
NON-PROFIT Yes
Nonprofits may obtain bank loans, grants, venture capital, and tax-exempt donations. In some states, Nonprofits may sell stock.
TAX
Pass-throught Taxation
LLC Yes
LLCs are not taxed at the corporate level. Instead, all profit and losses are reported with the personal income taxes of each member.
C-CORP No
The income of the C Corp is taxed at the corporate level and then again at the shareholder level.
S-CORP Yes
S Corps are not taxed at the corporate level. Instead, all profit and losses are reported with the personal income taxes of each shareholder (owner).
NON-PROFIT Yes
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
Double Taxation
LLC No
LLCs are not taxed at the corporate level.
C-CORP Yes
The income of the C Corp is taxed at the corporate level and then again at the shareholder level.
S-CORP No
S Corps are not taxed at the corporate level.
NON-PROFIT No
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
Tax Exempt
LLC No
LLCs are not eligible for tax-exempt status.
C-CORP No
C Corps are not eligible for tax-exempt status.
S-CORP No
S Corps are not eligible for tax-exempt status.
NON-PROFIT Yes
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
