We use a INCFILE to create new entities for our clients. You’ll learn about the four main types of business for profit business entries : LLCs, S Corporations, C Corporations, and Sole Proprietor/Partnerships, one of these should meet your needs.
Limited Liability Company (LLC)
The LLC is a very popular and common business for. It is well suited for small organizations and startups companies, for these reasons;
- LLCs are very easy and can be set up rapidly.
- LLCs have a non-complex business structure
- Opening an LLC is not expensive.
- Managing an LLC is simpler than managing a C Corp or S Corp.
- LLC’s don not have as many rules, regulations and compliance issues as other business entities.
- LLCs are registered at the state level
- Each state determines de regulations that govern the LLC’s as well as the registration and renewal fees.
- It is suggested that you verify the specific state requirements and regulations for LLC’s.
LLC Limited Liability Protection
LLC’s as well as corporations (C and S), give the owners limited liability protection. The business assets (account receivables, land, reals estate, equipment, etc.) are the property of the LLC. Liabilities of the business entity are solely theirs, and normally, should not affect the personal assets of the owner or owners.
LLC Taxes and Tax Returns
LLC’s are considered “pass through” business entities, and do not pay any federal income taxes. Net profits or losses are computed in the personal tax returns of the owner or owners. LL is. Taxation of LLC’s ia similar to the taxation of partnerships and sole-proprietorships
Types of Tax an LLC is Liable For
LLCs’ are responsible por the payment of certain taxes such as:
- Payroll taxes on wages paid to employees. Owners/Members are not including (they will have to pay their self-employment tax on their personal tax returns).
- Payment of requires Sales tax on tangible products and taxable services acquired by the business for their use.
- Real Estate Taxes on property that is owned by the LLC.
- In certain instances, there may exist other taxes/tariffs that may be required be paid by the LLC.
- Normally, these taxes can be posted as business expenses and will not be included in the owner (s), or member (s) personal income tax return (s).
Subchapter S Corporation (AKA: Small Business Corporation or S Corporation)
The business entity known as S Corporation, or S Corp, was promulgated into law by the United States Congress in 1958. Its purpose was to create incentives for the creation of small and family businesses, with the feature of taking out the double taxation associated with regular corporations (C Corps). These are some of the features of S Corps:
- Each state has its own rules and regulations related to the formation and operation of S
- Owners of the S Corp are protected and separated from the liabilities of the business entity.
- Owners and investors are only liable up to the amount their investment in the S Corp.
- Other liabilities such for business debts, claims, or other, are the sole responsibility of the S Corp., while owners and investors and not liable.
- An S Corp requires more compliance, and has more complexities, legalities, and rules, than an LLC.
- The organizational structure of the S Corp is more complex than that of an LLC
- The number of shareholders of S Corps may not be in excess of 100.
- Managing a C Corp is more complex and harder than managing a S Corp.
S Corporation Taxes and Tax Returns
The S Corporation does not federal or state corporate income taxes. S Corporations have a special i tax designation determined by the Internal Revenues Service. As well as the LLC, the net profits or losses of the S Corporation will be transferred to the personal income tax returns of the shareholders and owners. Taxations of such profits or losses occur at the personal level. Similar to LLC’s, The S Corp has to pay for certain taxes such employees payroll, property, real state and sales tax on purchases used for business purposes; however S-Corporation MUST pay their officers a reasonable compensation
Forming an LLC but Paying Tax as an S Corp
If you register an LLC, you have the option to have the entity treated as an S Corp for tax purposes. Here are some of the advantages:
- Running and complying with regulations and rules for and LLC, may be less costly than for an S Corp.
- Subject to taxation as an S Corp, may create advantage for owners and members, when receiving distributions from the business.
- Owners/Officers will need to pay themselves reasonable wages which are subject to 12.% FICA taxes, which is the same as Employment taxes paid as a LLC/Partnership/Sole Proprietor
- Any other monies paid to owners will be “distributions”, not have to pay self-employment taxes on those
- Taxable Income of the S-Corporation is calculated without regard of distributions, and the owners of the S-corp will be paying income taxes in that net income regardless if it was distributed or not.
The C Corporation
C Corps, also known as a C Corporations, are business entities registered and regulated by the states. “Articles of Incorporation” are filled with the Division of Corporations, Secretary of State, or a similar state agency designated for such purpose, in the state of incorporation. The C Corporation is the most formal type corporate structure and business entity. Regulations and fees required to create a C Corp are different for each state.
Some features that may affect your decision to open a C Corp are:
- Since a C Corp has limited liability, owners and Investors are not generally liable for business debts and other liabilities.
- The property of stock in the company determines ownership.
- C Corporations are required to issue shares of stock
- The holding of an Annual General Shareholders Meeting, is a requirement of a C Corporation.
- The property of shares in a C Corp may be easily transferable. However, there may exist pre-emptive rights, in which case shares have to be offered first to the other existing shareholder (s).
- For purposes of obtaining additional financing, the C Corporation may choose to offer it shares to the public thru an Initial Public Offering (IPO). If this is the case, shares may be easily purchased and sold thru the Stock Markets, where such shares are registered to trade.
- A C Corp must nominate a Board of Directors
- There are multiple rules and regulations that govern a C Corp.
- Profits of the C Corp are taxed at the corporate level, as well at the personal level for owners, if dividends have been declared and paid.
How Taxes Work in A C Corp
C Corporations must File and pay income taxes on profits, unlike LLC’s and S Corporations, which pass through such profits to members or shareholders respectively.
When dividends are paid to shareholders of a closely held C Corporation, these must declare and pay taxes on such dividends (which may be 0%, 15%, or 20% based on their income levels). This is known as “double taxation”: income taxes paid at the corporate level, and then income taxes paid at the personal level. Without regard of dividends, a C Corp will also have its own net income that it would need to pay taxes to the IRS at a flat rate of 21%. Most states do have a state income tax on the C Corp’s net income, while others have a franchise tax based on gross sales. Check with your state on this
Sole Proprietorships and Partnerships
Sole proprietorships and partnerships are not considered to be formal business entities. However, certain individuals may choose to operate their business as a sole proprietor or as a partner. If this is the case, then there is not a separate business entity, meaning that the business and the individual are the same. The results of the business operation are reported in the individual tax return, and items such as: income, expenses, depreciation, and other financial transactions, will be reported at the personal level. Sole-proprietor and partners, have no protection against liabilities, claims, and/or lawsuits derived from their business activities.
- Sole proprietors have to file with the IRS a Schedule C form together with the taxpayer’s form 1040. When an LLC has just one single owner, this will be deemed as a “single member LLC”, which is the same as a sole proprietor for tax purposes
- Partnerships have filed the 1065 form with the IRS. When an LLC has more than one owner/member, this be deemed a “multi member LLC”, and has to file income taxes as a partnership
Ready to setup your LLC or Corporation on your own? we recommend INCFILE
If you want one-on-one Advice on the best entity type and which is the best state to incorporate based on your needs, call 954-414-1524 or email email@example.com. The consultation cost is $375 and you will have a clear plan for what is the best option for you!