C Corporation or General Business Corporation
Good to Know: The C corporation is the most widely used by both small and large businesses that plan to have shareholders.
Need to Know: The shareholders own the corporation, but their personal assets are protected from creditors. Shareholder liability is generally limited to the amount each has invested in the corporation.
S Corporation
Good to Know: An S Corporation avoids the double taxation inherent to general business corporations, in which both profits and dividends are taxed.
Need to Know: Certain requirements must be met before qualifying, so we strongly recommend consulting tax and legal advisors before electing S Corporation status.
- Limits on shareholders. By law, the number of eligible shareholders is limited to 100. Only individuals and certain trusts and estates are allowed to own stock.
- Shareholder definition. What constitutes “one shareholder” has changed. Previously, a husband and wife qualified as “one” for S Corporation purposes. Now, the law allows “members of a family” to qualify as “one” and defines “members of a family” as the common ancestor, the lineal descendants of the common ancestor and the spouses or former spouses of the lineal descendants or common ancestor.
- Stock restrictions. S Corporations have "one class of stock" restrictions. All distributions and allocations must be the same for each share. If an S Corporation violates any of these rules, the S election is revoked.
- IRS filing. To obtain S Corporation tax status, all shareholders must sign IRS form 2553 which must be filed within 75 days of starting business. Incorporators USA can assist you with this filing or prepare it for you.
Good to Know: An LLC is a legal entity separate and distinct from its owners, who are called "members." Members of an LLC may include any number of individuals, partnerships, corporations, trusts, nonresident aliens, etc.
Need to Know: When properly structured under applicable state statutes, LLC members have the same limited liability protection afforded stockholders in C or S corporations.
- Liability. Absent any specific personal guarantees, the amount at risk for members is limited to their investment in the LLC. Their personal assets are generally beyond the reach of creditors. This protection is enjoyed by all members, unlike a limited partnership which requires one general partner to remain liable for partnership debts. And, unlike limited partners, LLC members may be active in company management without risking their limited liability status.
- Tax benefits. LLC members may also enjoy the same flow-through tax benefits which are applicable to partners of a partnership.
- Stock distributions. Unlike S Corporations, LLCs may (and typically do) base profit distributions and allocations on member contributions, rather than on a per capita basis.
Available only in Delaware and New York
Good to Know: A nonprofit corporation is designed to provide tax-exempt status for socially beneficial businesses that support charitable, religious, educational or scientific activities. It may not be used if you intend to run your business for profit.
Need to Know: Most nonprofit corporations have either tax-exempt or 501(c)(3) status, which exempts them from paying taxes on income. To obtain either of these tax designations, an Application for Recognition must be filed with the IRS.
Good to Know: A general partnership involves at least two people, with no maximum on the number of partners allowed. There are no state filings required to form a partnership. Taxes are collected on individual partners, not on the entity. A limited partnership is a statutory form of partnership consisting of one or more general partners who manage the business and one or more limited partners who invest in the business and do not participate in management.
Need to Know: Liability is unlimited for general partners – meaning personal assets can be seized to satisfy business debt. Limited liability is extended for limited partners who do not participate in management.
Good to Know: A sole proprietorship is a business conducted by one owner, who is taxed as an individual.
Need to Know: Sole proprietors have no liability protection and are personally liable for business debt. Personal assets are fair game for business creditors.
