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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.
Limited Liability Company
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 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.
S-Corporation
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.
C-Corporation
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.
Nonprofit Corporation
A Non Profit corporation is a corporation whose principal purpose is 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 a 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 here to help decide if that is the proper entity of formation for your business.
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Launch Your BusinessCompare and Contrast Different Business Entities
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. Additionally, a unique feature of the LLC is that it can achieve the same tax classification as an S or C Corporation while bypassing the formalities associated with them.
LLC
LLCs provide personal asset protection, which shields you from being personally liable for business debts.
Corporation
C Corps provide personal asset protection, which shields you from being personally liable for business debts.
S-Corporation
S Corps provide personal asset protection, which shields you from being personally liable for business debts.
Nonprofit
Nonprofits provide personal asset protection, which shields you from being personally liable for business debts.
LLC
LLCs are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
C Corporation
C Corps are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
S-Corporation
S Corps are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
Nonprofit
Nonprofits are required to pay formation fees to the state. Fees will vary based on the state of incorporation.
LLC
Depending on the state of incorporation, reports and fees may be required.
C Corporation
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-Corporation
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.
Nonprofit
For Nonprofits this varies from state to state.
LLC
LLCs must be member or manager managed according to the terms of the operating agreement.
C Corporation
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-Corporation
S Corps are required to have shareholder elected directors who oversee and elect officers to run the day-to-day operations of the company.
Nonprofit
Nonprofits are managed by their board of directors following the regulations set forth in their Bylaws.
LLC
Changes in ownership of an LLC are dependent on the terms of the operating agreement.
C Corporation
Ownership changes in a C Corp are easily made through the sell of stock to new or existing shareholders.
S-Corporation
Ownership changes in an S Corp are easily made through the sell of stock to new or existing shareholders.
Nonprofit
Nonprofits have no owners.
LLC
Depending on the state of incorporation, an LLC may be required to file an annual report and/or pay franchise fees.
C Corporation
After formation, C Corps have many ongoing formalities such as writing bylaws, selecting directors, holding initial and annual shareholder meetings, and issuing stock.
S-Corporation
After formation, S Corps have many ongoing formalities such as writing bylaws, selecting directors, holding initial and annual shareholder meetings, and issuing stock.
Nonprofit
After formation, Nonprofits have many ongoing formalities such as writing bylaws, selecting directors, and seeking tax exempt status.
LLC
LLCs are not allowed to sell stock but may be able to raise capital via bank loans and various other avenues.
C Corporation
C Corps may issue many types of stocks, which may be sold to an unlimited number of shareholders.
S-Corporation
S Corps may issue one type of stock, which may be sold to a maximum of 100 shareholders.
Nonprofit
Nonprofits may obtain bank loans, grants, venture capital, and tax-exempt donations. In some states, Nonprofits may sell stock.
LLC
LLCs are not taxed at the corporate level. Instead, all profit and losses are reported with the personal income taxes of each member.
C Corporation
The income of the C Corp is taxed at the corporate level and then again at the shareholder level.
S-Corporation
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).
Nonprofit
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
LLC
LLCs are not taxed at the corporate level.
C Corporation
The income of the C Corp is taxed at the corporate level and then again at the shareholder level.
S-Corporation
S Corps are not taxed at the corporate level.
Nonprofit
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
LLC
LLCs are not eligible for tax-exempt status.
C Corporation
C Corps are not eligible for tax-exempt status.
S-Corporation
S Corps are not eligible for tax-exempt status.
Nonprofit
The income of Nonprofits is taxed at the corporate level unless they apply for and are granted tax-exempt status.
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