TYPES OF US CORPORATIONS
C CORPORATION
A C Corporation is a completely separate tax and legal entity from its owners, and owners who work in the business are treated and taxed as employees of the corporation (Note: The “C” in C Corporation refers to a subchapter of the tax code; C-corporations are one of the most common forms of corporations, and they are frequently referred to generically as corporations). C Corporations are subject to corporate income taxes separate from the owners, where most other forms of business entity allow for the company profits to “pass-through” to the personal income tax statements of the owners. As such, C Corporations are the most formal business entity and they have greater tax reporting responsibilities than other business entities. C Corporations allow for profits to be retained in the business, if desired, and frequently these profits can be taxed at a lower rate than personal income. C Corporations can also pay out after tax profits to its owners in the form of dividends, but this can also lead to double taxation.
ADVANTAGES OF A C CORPORATION
Limited Personal Liability
Perpetual Existence
Better Fringe Benefits
Advantageous Corporate Tax Treatment/Income Splitting
DISADVANTAGES OF A C CORPORATION
More extensive record keeping requirements
Dividend payments can lead to double taxation
S CORPORATION
An S Corporation is a special form of corporation (Note: The “S” in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is “passed through” to the personal income of its owners (shareholders) in proportion to their ownership interest. An S Corporation is created by forming a traditional C Corporation and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.
Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.
ADVANTAGES OF A S CORPORATION
Limited Personal Liability
Perpetual Existence
Better Fringe Benefits
Pass-Through Taxation
DISADVANTAGES OF A S CORPORATION
More extensive record keeping requirements
Restrictions on number and type of allowable shareholders
Additional Restrictions
LLC (Limited Liability Company)
The LLC (Limited Liability Company) is the newest form of business entity, and it is rapidly becoming one of the most popular ways for new and small businesses to operate. It is often described as a hybrid between a corporation and a partnership.
It limits personal liability, like a corporation, while providing a simpler and more flexible structure than most other forms of business. A single member LLC is taxed on the federal level the same as a sole proprietor, while a multimember LLC is taxed on the federal level the same as a partnership.
Since a huge number of small businesses are sole proprietorships and partnerships, an LLC is frequently an excellent choice for these types of businesses. It retains most of the benefits of a sole proprietorship or partnership with the added benefit of limited liability, with very little in the way of extra requirements.
ADVANTAGES OF A LLC
Limited Personal Liability
Flexible Management and Ownership Structure
Less Formalities and Paperwork
Pass-Through Taxation
DISADVANTAGES OF A LLC
Existence is not necessarily perpetual
Newer Type of Business Entity
Return to the DELAWARE LLC page.
