There are many different structures companies can take. A partnership is the most common, but specific industries might benefit more from having a corporation or sole proprietorship setup to their name instead. When choosing which type of entity you want for your company, some things need to be considered.
Some startup businesses are started as one of three business entities: a Limited Liability Company (LLC), an S corporation, or a C corporation. So how do they differ, and which is the best for your needs? In this article, I will explain the differences between these three choices in detail to help you decide on what’s right for you. The first difference between them is that LLCs limit personal liability while corporations offer limited protection from lawsuits because shareholders’ assets can be seized if necessary; however, both types must comply with IRS regulations. A second significant distinction among startup structures revolves around taxes – owners pay self-employment tax when operating their single
S corporations
Converting your business into an S corporation is a great way to reduce the amount of taxes you have to pay. An S corporation has many advantages that might save you money and maximize your profits, including pass-through taxation, which means all profit goes towards personal tax returns instead of being taxed twice like it would be if this were not done correctly.
S corporations are entities used for businesses in order cut down on double taxation by only taxing them once instead of at both corporate rates and individual levels so they can offer more savings opportunities such as paying less or no self-employment income tax since there are no employees under the company umbrella when compared with C Corporations
Benefits of S Corporations:
- By forming a corporation, shareholders can limit their own liability in case the business becomes insolvent. Shareholders may not be held responsible for any debts or liabilities incurred by the company as long they observe legal formalities and refrain from taking on debt themselves.
- The owners (shareholders) of an S corp will typically receive stock certificates that show ownership interest instead of learning about this from filing documents as you would with a C Corp
- If you properly make an “S” tax election on IRS Form 2553, your business’s profits are only taxed once at the shareholder level. This can save investors money and is a smart move for any small business that wants to grow their company and continue working with minimal taxes!
C Corporations
A C Corporation is a financial entity that can own other businesses, and it can borrow money. It might be easier for you to think of this as an individual who acts as their own boss because they do not have any accountability unless creditors are looking out for them.
Benefits of C Corporations:
- Shareholders are not liable for the company’s debt or liabilities. This is an excellent benefit because it means that even if something goes wrong, there will be no personal financial culpability on their part.
- A C corporation must have a Board of Directors, which oversees and governs the corporation. One person alone can serve on this board if there is only one shareholder. The bylaws set forth various rules and procedures governing the company, including how many people are needed for its representation in terms of both size and diversity (e.g., gender).
LLCs
An LLC is a legal entity that can be used to form and operate a business. An individual could do so by filing with the state government, which would give them liability protection for their company’s actions and favorable “pass-through” tax treatment.
Benefits of LLC’s:
- The owners of the LLC are generally not personally liable for their business’s debts or liabilities.
- LLCs can have tax rates that are lower than traditional corporations depending on the size of their company. Profits from LLC memberships don’t get taxed at both levels, which means your share is getting a little more money in its pocket!