The Limited Liability Company (“LLC”) is the newest and perhaps most common form of business entity. Unlike the Limited Partnership, which has liability protection for only some of the partners, the Limited Liability Company protects everyone – the members and the managers.
The LLC can be taxed as a partnership, a C Corporation, an S corporation or a disregarded entity (proprietorship). This flexibility and a minimal amount of annual filings required make it the most commonly used entity type.
Another option is a Corporation. Creating a Corporation is like creating an artificial person. Because Corporations are legally separate entities and they also have a much different tax structure. They pay their own separate taxes at a corporate tax rate instead of a personal tax rate.
In addition to the separate tax structure, Corporations have an unlimited life, flexibility in ownership and management structures. These benefits can make corporations an ideal choice for businesses but, with all of the recordkeeping requirements, can require annual paperwork to maintain.
An S-Corporation is subject to the same filing requirements (annual paperwork) as a regular Corporation (also sometimes called a “C-Corporation), however has a pass-through tax status that is similar to a partnership, and reports its earnings on your personal return. This makes life a little bit easier because you can avoid paying taxes at the corporate and personal level. However, S-Corporations have ownership limitations. Non-U.S. citizens and other entities cannot own shares in an S-Corporation and the number of shareholders is limited to 100. Also, all stock must share equally in profits.
Which one is best? It depends on your situation.
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