When the time comes to incorporate your business, every business owner must make the decision of which corporate structure to legally choose for the business. Filers are given the choice between forming an LLC, C Corp and S Corp, which each offer specific benefits and drawbacks, depending on the business in question.
When making the choice between these three entities, a number of factors must be considered. The main characteristics of each structure follow, along with detailed accompanying videos on these topics featuring the Robert Hall team of experts.
First, here’s a short video that provides an overview of your options for choosing a business entity:
The Limited Liability Company (LLC)
Forming a Limited Liability Company (LLC) provides business owners with personal liability protection, just as one receives when doing business as a corporation. Similar to an S corporation (or S corp), business income and expenses are reported on the owner’s personal tax return, often on Schedule C of IRS Form 1040, which is also used by sole proprietors. Some reasons to choose an LLC for your corporate structure include:
- Your business owns real estate.
- You desire a flexible company management structure.
- You’re also seeking flexibility in what accounting methods are used.
- You want greater control of profit-sharing options among owners.
- You anticipate losses for at least two years and you want to pass the losses through to yourself and other owners (if any).
- You value a simplified, less formal structure, without mandates for annual shareholder and director meetings, and documentation of said meetings.
The S Corporation (S Corp)
As with an LLC, an S corporation’s profits, losses and other tax items pass through the corporation to the business owner and are reported on their personal tax return, so essentially the S corp does not pay tax. Good reasons to consider forming an S corp include:
- You’ll enjoy greater leeway for setting salaries for employees and owners in order to minimize Social Security and Medicare taxes.
- S corps may also employ flexible accounting methods, which typically don’t use the accrual method employed by C corps.
- You can take advantage of benefits of a corporation, as well as the pass-through taxation advantage of an LLC.
- S corps face lower risk of an IRS audit, since S corporations file an informational tax return (Form 1120 S). Audit rates are higher for business income reported solely on Schedule C of Form 1040.
The C Corporation (C Corp)
The most complex and demanding of the business structures, a C corporation (or C corp) is a separate taxpayer from the business owner(s). When corporate profits are distributed to owners in the form of dividends, owners must then pay personal income tax on the distribution, for “double taxation.” Still, there are some sound reasons you may want to operate as a C corp, including:
- The desire to finance the business through venture capital.
- Flexible profit-sharing options among owners.
- The structure helps keep company earnings within the business, aiding growth.
- For tax-planning, options are available for distributing business earnings between the corporation and shareholders.
- Owners can set salaries for employees and owners that minimize Social Security and Medicare taxes.
- The C corp can provide significant healthcare and medical benefits, as well as other benefit programs for education, life insurance, transportation costs and more.
- When you want to sell your business, it’s easier to do it as a C corp.
- C corps can offer stock options to employees.
- Your business will own real estate.
- You’ll lower your risk of an IRS audit, because audits are conducted more frequently when a Schedule C is filed for Form 1040.
Are you seeking guidance for forming your new business and planning for future taxes? Call us today at (818) 242-4888 or schedule your free 30-minute consult now. Robert Hall & Associates is a leading corporate and business tax preparer and consultant serving Glendale, Burbank, Pasadena and the Greater Los Angeles area. Our team of enrolled agents can guide you through the business formation process and advise you on how to prepare for upcoming filings.