What Business I Need?
Limited Liability Company or LLC
Like a corporation, a limited liability company or “LLC” is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.
How Does an LLC Protect You?
One of the primary advantages of an LLC is that its owners, called members, have “limited liability” meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC. For example, if an LLC is forced into bankruptcy, then the members will not be usually be required to pay the LLC’s debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC. Benefits of an LLC: Flexible, Scalable, and Simple LLCs aren’t bound by the same rigid rules of corporations, but this doesn’t stop them from being just as useful. It doesn’t matter if you are a one-man business or if you have hundreds of employees, an LLC keeps protecting you while allowing for expansion and growth. With an LLC, there’s no requirement for special meetings, extensive corporate records, or many other formalities. Limited liability companies are even flexible when it comes to taxes, offering lots of options so you can create a tax plan that works for you. This simplicity, protection, and ease of use have made forming an LLC a popular choice for small businesses in America.
Corporation
A corporation is a distinct legal entity created under state laws which can open a bank account, purchase property, enter into contracts and operate a business. One of the most important features of a corporation is that, generally, its owners are not personally liable for the debts of the corporation. The main reason people incorporate is to avoid personal liability. While sole proprietors and partners have all of their personal assets at risk, corporate shareholders risk only what they paid for their stock. With so many people ready to sue for any reason (or for no reason), the corporation is one of the few inexpensive protections left.
What are the main differences between a C corporation and an S corporation?
C corporations are subject to double taxation; that is, one tax at the corporate level on the corporation and net income, and another tax to the shareholders when the profits are distributed. S corporations have only one level of taxation. All of their income is allocated to the shareholders. However, C corporations have greater tax planning flexibility and can shield shareholders from direct tax liability. In addition, S corporations are subject to limitations, such as the number and type of shareholders they can have
S Corporation or C Corporation
A corporation has a choice of how it wants to be taxed. It can make the election at the beginning of its existence or at the beginning of a new tax year. The choices follow.
S Corporation
Formerly called a “Sub section S corporation”; an S corporation pays no income tax and may only be used for small businesses. All of the income or losses of the corporation for the year are passed through to the shareholders, who report them on their individual returns. At the end of each year, the corporation files an information return, listing all of its income, expenses, depreciation, etc., and sends each shareholder a notice of his or her share as determined by percentage of stock ownership.
Advantages
Using this method avoids double taxation and allows the pass-through of losses and depreciation. For tax purposes, the business is treated as a partnership. Since tax losses are common during the initial years due to start-up costs, many businesses elect S status and switch over to C corporation status in later years.
C Corporation
A C corporation pays taxes on its net earnings at corporate rates. Salaries of officers, directors, and employees are taxable to them and deductible to the corporation. However, money paid out in dividends is taxed twice. It is taxed at the corporation’s rate as part of its profit, and then at the individual stockholders ; rates as income, when distributed by the corporation to them.
Advantages
If taxpayers are in a higher tax bracket than the corporation and the money will be left in the company for expansion, taxes are saved. Fringe benefits, such as health, accident, and life insurance, are deductible expenses. NOTE: All corporations are C corporations unless they specifically elect to become S corporations.