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Best kind of corporation - S Corp C Corp or LLC?A corporation is simply a legal entity that exists separately from its owners, bestowed with certain legal rights and obligations, much like a person. A corporation exists as a legal entity, regardless of who its owners or employees are. Since it is a legal entity, it is subject to laws regarding incorporation, and the first consideration is what TYPE of corporation to form. There are 3 main types of corporation: C Corp, S Corp, or Limited Liability Corporation, also known as an LLC.
Forming a corporation - incorporate onlineWhat is a C Corp? A C Corp is the oldest type of corporation, existing as an entity completely separate from its owners. The C Corporation is taxed on its profits, whether they are retained or paid out as dividends, sometimes resulting in what is called double taxation. C Corporations have much more complex tax filing requirements than S Corps (an S Corp files a simple annual return showing the amount of profit or loss, who the owners are, and what percent of the profit or loss they receive). What is an S Corp? The S refers to subchapter "S" in the federal tax code. They are treated much like C Corps except in the way their profits are taxed. In an S Corp, the profits are passed through directly to the owners of the company and show up as part of their personal income (or loss). To form an S Corp, you first form a C Corp and then file additional paperwork to petition for Subchapter S Election (IRS form 2553). Once the IRS grants your election, you are now an S Corp. One benefit of an S Corp is that profits passed through to owners (above and beyond any salary they may receive) are not subject to self employment taxes (social security, medicare, etc.), which can result in tax savings. One downside of S Corporations is the limit placed on the number and nature of shareholders (cannot have more than 75, must be US residents), which are not as flexible or as accomodation as C Corps. Limited liability is a common feature in both C Corps and S Corps. As always, consult with a tax attorney if you have questions regarding tax treatment of S Corps.The third common form of incorporation is the LLC, Limited Liability Corporation. The LLC is sort of a combination between a corporation and a partnership, and is popular with alot of small businesses. Like all corporations, it provides limited liability to its owners, while earnings are passed through to owners and taxed at the same federal level as the individual or partnership would have paid. Generally an operating agreement is drafted that how the partnership functions. With less paperwork and less formalities, it is often a better choice than the C or S Corp, depending on the businesses needs.
When choosing the appropriate type of ownership structure for your business, you need to think about some key things: what are the risks and liabilities associated with the business? what is your tax situation? what are the costs and formal requirements that you are willing to accept? Many people start their small businesses as sole proprietorships, and then incorporate them at a later date when financial obligations or asset protection requirements become greater - there is nothing wrong with this approach, but keep in mind that even if your business is small, your personal assets can still be at risk in an unincorporated business.
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