Choosing Your Business Structure

A corporate structure where the members of the company cannot be held personally liable for the company's debts or liabilities. An LLC is an entity created by state statute.

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as a corporation, a partnership, or as part of the owner's tax return (a disregarded entity). A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. A single-member LLC is treated as a disregarded entity unless it files Form 8832 and elects to be a corporation. For employment tax and certain excise taxes, an LLC with only one member is still a separate entity.

S-Corps elect to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. Shareholders report the flow-through of income and losses on their personal returns and pay tax at their individual rates. This lets S-Corps avoid double taxation on corporate income. S-Corps are responsible for tax on certain built-in gains and passive income at the entity level.

To become an S-Corp, submit Form 2553 (Election by a Small Business Corporation) signed by all shareholders. See the Form 2553 instructions for required information and where to file.

A legal entity separate and distinct from its owners. The following businesses formed after 1996 are taxed as corporations:

• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
• A business formed under a state law that refers to it as a joint-stock company or joint-stock association.
• An insurance company.
• Certain banks.
• A business wholly owned by a state or local government.
• A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).
• Certain foreign businesses.
• Any other business that elects to be taxed as a corporation.

In forming a corporation, prospective shareholders exchange money, property, or both for the corporation's capital stock. A C-Corp is a separate taxpaying entity for federal income tax purposes - it conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders.

The double-taxation catch. Profit is taxed at the corporation when earned, then taxed again to shareholders when distributed as dividends. The corporation doesn't get a tax deduction for dividends, and shareholders can't deduct corporate losses.