Which Business Structure Will Save On Taxes? LLC, S Corporation or C Corporation?

Below are comparisons of different business structures for your new business.  This is an important decision and will determine how your business is taxes for the life of the business.  Avoiding double taxation is the most important element for many small business owners, however, eliminating or lowering liability is equally important.

When it comes to incorporating or forming an LLC, most small businesses tend to focus on one thing… taxes. FREE Business Structure Wizard  

If you decide you’re ready to incorporate your business, it’s natural to wonder what business structure will give you the best results tax-wise. Is there a way to pay less self-employment taxes? Will you be stuck with too much paperwork? What about “double taxation”?

It’s wise to consult with a tax advisor or accountant on the particulars of your own situation, but here are a few things to know about business structures and taxes:

The Sole Proprietor

Sole proprietors report their business income on their own personal tax returns (Schedule C). They also need to pay self-employment tax on the profit (Schedule SE). Note that self-employment tax rate for 2012 is set at 13.3% for the first $106,800.

Let’s say you’re a freelance graphic designer that’s operating as a sole proprietor in the U.S. If you earn $56,000 in profit with the business, you’ll need to pay taxes on the profit at your individual tax rate, in addition to paying self-employment taxes.

The Bottom Line:

The sole proprietorship is the simplest business structure and offers the lowest amount of legal formalities. However, it does not separate your personal finances from your business and does not offer any liability protection. Additionally, in some cases, sole proprietors end up paying more in taxes due to self-employment taxes. Sole proprietorships have some of the highest audit rates with the IRS. (Note from Admin:  When Form 1040 Schedule C tax returns are done correctly, it can lower the chances of an audit)

The C Corporation

A C Corporation is considered a separate business entity and files its own tax returns. Therefore, as a C Corporation owner, you’ll need to file both a personal tax return and a business tax return.

Let’s say you own a small digital media agency and formed a C Corporation for it. Your Corporation will first be taxed on its profits in its corporate tax return. Then, if you want to take that money home, you’ll need to distribute it to yourself (or any other shareholders) in the form of a dividend. These dividends will be taxed on your personal tax return at the qualifying dividend rate. This is what’s known as “Double Taxation” and can be pretty hefty for the small business.

The Bottom Line:

As you can see, double taxation can be a problem for a small business that is profitable and where the owner wants to put the profit in his or her wallet. However, the C Corporation can offer more flexibility and tax benefits in certain circumstances. For example, it can be a good structure if you want to invest the business’ profit to grow the business. Talk to your tax advisor before forming a C Corporation to make sure it’s the right entity for you.

The S Corporation

Small businesses often opt for the S Corporation in order to avoid double taxation. An S Corporation does not file its own taxes. Rather, company profits are “passed through” and reported on the personal income tax return of the shareholders.

S Corporation owners are taxed on the company profits based on the percentage of shares they own (for exForm an S-Corp and Benefit from Tax Advantages!

Example, if you own 50% of an S Corporation, you’ll be taxed on 50% of the profits). If S Corporation owners actively work in the business, the business must pay them a reasonable wage for whatever job they do. If you elect S Corporation Status for your corporation, your business itself will pay no income tax. If you work in the business, you need to pay yourself a reasonable wage for your job and these wages are subject to your personal income tax rate. Then if you decide to distribute the rest of the profits to yourself as a dividend, these will be taxed at the qualifying dividend rate. The

Bottom Line:

The S Corporation avoids the problem of double taxation, but still demands all the legal formalities of a Corporation. It can be beneficial for many small businesses, but there are some restrictions for who can form an S Corporation. An S Corp cannot have more than 100 shareholders. All S Corp shareholders must be individuals (not LLCs or partnerships) and legal residents of the United States.

The LLC

The Limited Liability Company (LLC) offers flexibility when it comes to federal tax treatment. That’s because the LLC is an entity created by the states. The IRS allows the LLC to be taxed as a corporation or sole proprietor, depending on what the LLC members choose.

For example, you can choose to structure your LLC as a single-member disregarded entity and it will be taxed like a sole proprietor. Or you can structure your LLC to be taxed like a C Corporation or S Corporation.

The Bottom Line:

The LLC can be a good choice for small business owners who want liability protection, without all the procedural formality associated with a Corporation. An LLC gives you flexibility in terms of taxation – but after forming an LLC don’t forget that you need to decide how your business should be taxed. Incorporate or Form an LLC in minutes.

In summary

There’s no single “right” business structure for every small business. What’s right for you will ultimately depend on your specific business needs, circumstances, and future plans. Discuss your particular situation with a trusted tax advisor or accountant in order to decide what business structure will give the best tax treatment for both you and your business.

Use You Refund Check to Start Your Own Business, the S Corporation will avoid double taxation

Now that tax season is officially closed, it’s time to put 2012 behind us and focus on 2013. Put that refund check to good use and invest it in your future!  Start a business so you can put that 9-5 cubicle rut behind you and be an entrepreneur who makes your own schedule!

Find the Best Structure for Your Business - Free Business Structure Wizard, Learn the differences between the different business structures.  Form an S-Corp and Benefit from Tax Advantages! Get Started with CorpNet® for as Low as $49 Today!


The C Corporation

A C Corporation is considered a separate business entity and files its own tax returns. Therefore, as a C Corporation owner, you’ll need to file both a personal tax return and a business tax return.

Let’s say you own a small digital media agency and formed a C Corporation for it. Your Corporation will first be taxed on its profits in its corporate tax return. Then, if you want to take that money home, you’ll need to distribute it to yourself (or any other shareholders) in the form of a dividend. These dividends will be taxed on your personal tax return at the qualifying dividend rate. This is what’s known as “Double Taxation” and can be pretty hefty for the small business.

The Bottom Line: As you can see, double taxation can be a problem for a small business that is profitable and where the owner wants to put the profit in his or her wallet. However, the C Corporation can offer more flexibility and tax benefits in certain circumstances. For example, it can be a good structure if you want to invest the business’ profit to grow the business. Talk to your tax advisor before forming a C Corporation to make sure it’s the right entity for you.

The S Corporation

Small businesses often opt for the S Corporation in order to avoid double taxation. An S Corporation does not file its own taxes. Rather, company profits are “passed through” and reported on the personal income tax return of the shareholders.

S Corporation owners are taxed on the company profits based on the percentage of shares they own (for example, if you own 50% of an S Corporation, you’ll be taxed on 50% of the profits). If S Corporation owners actively work in the business, the business must pay them a reasonable wage for whatever job they do.

If you elect S Corporation Status for your corporation, your business itself will pay no income tax. If you work in the business, you need to pay yourself a reasonable wage for your job and these wages are subject to your personal income tax rate. Then if you decide to distribute the rest of the profits to yourself as a dividend, these will be taxed at the qualifying dividend rate.

The Bottom Line: The S Corporation avoids the problem of double taxation, but still demands all the legal formalities of a Corporation. It can be beneficial for many small businesses, but there are some restrictions for who can form an S Corporation. An S Corp cannot have more than 100 shareholders. All S Corp shareholders must be individuals (not LLCs or partnerships) and legal residents of the United States.

The LLC

The Limited Liability Company (LLC) offers flexibility when it comes to federal tax treatment.  That’s because the LLC is an entity created by the states. The IRS allows the LLC to be taxed as a corporation or sole proprietor, depending on what the LLC members choose.

For example, you can choose to structure your LLC as a single-member disregarded entity and it will be taxed like a sole proprietor. Or you can structure your LLC to be taxed like a C Corporation or S Corporation.

The Bottom Line: The LLC can be a good choice for small business owners who want liability protection, without all the procedural formality associated with a Corporation. An LLC gives you flexibility in terms of taxation – but after forming an LLC don’t forget that you need to decide how your business should be taxed.
In summary

There’s no single “right” business structure for every small business. What’s right for you will ultimately depend on your specific business needs, circumstances, and future plans. Discuss your particular situation with a trusted tax advisor or accountant in order to decide what business structure will give the best tax treatment for both you and your business.

Tax Advantages of Starting a LLC; Limited Liability Corporation

Limited Liability of an LLC

Like a corporation, owners of an LLC enjoy limited liability, which protects their personal assets from judgments and other obligations of the entity.  You can download a free business check list at CorpNet.

When the LLC incurs debts or liabilities, the creditors are limited to the assets of the LLC. In the event the assets are insufficient to cover the debts of the business, creditors may not generally collect additional amounts from the members.

With a Sole Proprietor business structure, the owner of the business is personally liable for all the obligations of the business.

Fewer Formalities Required

A Limited Liability Company usually requires fewer formalities than a corporation, such as regular meetings of a board of directors and an annual meeting of shareholders, like an S or C-Corporation.

However and LLC does require proper filing of Articles of Organization with the Secretary of State to be formed and the members of the LLC are required to enter into an Operating Agreement that governs how the LLC will be operated.

Pass-Through Tax Treatment

LLCs are treated as “pass through” entities under the Internal Revenue Code unless the members elect to have it taxed like a corporation.

This means that the owners report profits and losses only on their own personal income tax forms and no separate entity level filing is required.

If a C-Corporation earns a profit, that profit is taxed. If those profits are then distributed to its shareholders, the shareholders pay income taxes on those dividends. This is known as the “double tax” and, while there are ways for small businesses to legitimately avoid the double tax, LLCs that have pass-through tax treatment are not subject to this type of tax treatment.

You can form a LLC within minutes, online for $49, plus state filing fees.

How to Legally Start a New Business for $49, Plus State Filing Fees, Determining the Business Structure

Before you take another step, one of the first things you have to do is decide on what business structure you want for your new business. The FREE Business Structure Wizard at CorpNet can help you decide based on your business goals and the tax benefits you want to take advantage of.

Determining the Business Structure


More importantly than tax benefits, depending on what type of business you are starting, you want to protect yourself and your family from liability. Using the Business Structure Wizard will help you make that decision, which includes legal factors, tax benefits, reporting and business structure.

Sole Proprietorship is usually the cheapest when it comes to paying to have your business taxes completed.  Sole Proprietorship includes your business income and expenses right on to your Form 1040 using a Schedule C.

You can use the FREE Business Structure Wizard to determine the best business structure.

The Business Structure Wizard guides users through a series of basic questions on their business, industry, finances, and long-term plans. The entire wizard should take approximately 5 minutes or less to complete and provides a recommended company structure based on the user's responses.

The wizard includes the following recommended business structures based on the user's responses: LLC (Limited Liability Company), C Corporation, S Corporation, Sole Proprietorship, Partnership, LLP (Limited Liability Partnership), and Non Profit Corporation. Help text provides additional details and explains the significance of each question. In addition, you can find helpful resources on each business structure, and if you'd like CorpNet.com can file and form the recommended business structure for you.

This is not something you want to take lightly. The business structure you select can affect your business in so many ways and is the determining factor in how you will report your business income and expenses to the IRS for the life of the business.  Use the FREE Business Structure Wizard  to determine the best business structure for your business.

 



How to Set Up Your Business, LLC, C Corp, S Corp, LLP, SP, Non Profit

The wizard includes the following recommended business structures based on the user's responses: LLC (Limited Liability Company), C Corporation, S Corporation, Sole Proprietorship, Partnership, LLP (Limited Liability Partnership), and Non Profit Corporation. Click on the invisible image! Choosing a business structure can be a tough decision for the new business owner. You are often in a quandry as to wheher you should incorporate, form an LLC, or simply file a DBA (aka "doing business as filing") and remain as a sole proprietorship or partnership. We've designed the Business Structure Wizard to be a very accessible starting point for anyone who wants to start a business or change their existing business structure. The Business Structure Wizard guides users through a series of basic questions on their business, industry, finances, and long-term plans. The entire wizard should take approximately 5 minutes or less to complete and provides a recommended company structure based on the user's responses. Go ahead: give it a try: