One of the first crucial decisions when starting a new business is choosing the right business structure. Often, new business owners consider forming a limited liability corporation (LLC) or a Corporation.
An LLC is a business entity that is separate from its owners, known as “members”, flexible in structure, and limits the personal liability of its members. The LLC can also choose different tax structures. It can choose to be taxed as a sole proprietorship or partnership, depending on the number of members, or as a Corporation.
A corporation can take two different forms: an S corporation or a C corporation. A C corporation is a standard corporation that is formed by filing articles of incorporation with the secretary of state where the business is to be incorporated. An S corporation is a closely-held corporation that derives its name from an IRS provision providing special tax treatment for an incorporated business that meets certain requirements.
To determine the best fit, an understanding of the tax and functional differences of each form is important:
In an LLC taxed as a sole proprietorship or partnership, there is no need to file a business tax return—each owner of the LLC pays personal income taxes based on their percentage of ownership in the company. As the business entity itself does not pay taxes (the individual owners pay personal income tax), taxes are said to “pass through” the LLC. An LLC, without employees, is not required to pay unemployment taxes or state disability taxes.
Taxes also pass through an s-corporation. In this structure, owners are paid a salary and the remaining profit or loss passes through the s-corporation and is taxed through an owner’s personal income taxes. S-corporations are generally required to pay unemployment taxes, state disability taxes, payroll taxes, and—in some states—state corporate taxes.
In a C corporation, the business is a separate entity that is required to file its own corporate tax return. The taxes do not “pass through” to shareholders.
An S corporation has several organizational requirements:
If these requirements are met, the business entity will not be required to file its own tax return and the taxes will pass through to the owners.
In an LLC, taxes also pass through the entity, but there is no limit on the number of members, which need not be United States citizens or residents. C corporations also have no restrictions on ownership and can issue stock in multiple classes.
The choice between forming an LLC or a corporation should be based on the particular needs and goals of your business. For guidance in selecting the best business structure and forming your business, contact our experienced business law attorneys in Myrtle Beach SC.