Not all business entity types are equal. The type of entity that is best for you and your business depends on the type of business you have, where it is now, and where you want it to go. In addition to state regulations governing entity types and activities, income taxes often differ based on the type of entity generating the income. Based on your business and your specific goals, we will advise on the pros and cons of each type of entity and the one best suited for your business.
A C corporation is treated and taxed as a separate entity. A potential disadvantage for this type of entity is that losses are trapped at the entity level and thus cannot be deducted by the owners. Another drawback is that earnings are taxed twice – once at the corporate level and again when they are distributed to the owners.
Advantages to the C corporation are that certain fringe benefits may be provided on a tax-favored basis. Also, this type of entity provides more flexibility in raising capital from outside investors. Different classes of stock are allowed and there is no limit on the number of shareholders.
Like a C corporation, an S corporation provides the “corporate shield” limiting it’s owners from personal liability. However, unlike a C corporation, an S corporation does not pay tax on its earnings. The taxable income generated by the S corporation is reported on the owners’ individual tax return and therefore is only taxed once. Losses from the S corporation are also passed through to the owners and are generally deductible on the individual’s tax return. There are limits to the number and type of shareholders in this form of organization and fringe benefits to the owners are reported differently than for non-owner employees.
A Limited Liability Company (LLC) is a hybrid of a corporation and a partnership. It provides the protection of a corporation, but allows more flexibility in ownership, operations and income allocation. The LLC has members rather than shareholders and by default, it is treated as sole proprietorship if owned by one member or a partnership if owned by more than one member. The members may elect to have the LLC treated as a C or S corporation.
Because of the many differences between the entity types, the one you choose will have a significant effect on your business. We are happy to meet with you and advise on which entity will be most beneficial for you. Know before you go.