In setting up a business, a single individual can operate and be taxed as a sole proprietorship, and two or more individuals can operate and be taxed as a partnership. However, using these structures means that the owner(s) will have unlimited liability for all debts of the business. As a result, not just the assets of the business are at risk if you are sued, but your personal assets are at risk, too. If you instead set up a C corporation, an S corporation or a limited liability company (LLC), your personal liability will be limited.
A C-corp is a taxable entity, unlike S-corps and LLCs. This means that any distributions of a C-corp are double-taxed. First, the entity is taxed and then the shareholders are taxed. C-corps can have an unlimited number of shareholders, non-US citizens as shareholders and corporate shareholders, which S-corps cannot. C-corps also provide more flexibility in providing fringe benefits to employees.
An S-corp is a corporation that has elected a special IRS tax status which eliminates the double-taxation problem. The profits or losses of the business are passed through to the shareholders who pay any tax due at their individual rates. An S-corp can often provide some tax savings due to the fact that S-corp profits are not subject to self-employment tax.
An LLC is less complicated than an S-corp, yet provides many of the same benefits. Like an S-corp, an LLC has “pass-through” taxation. LLCs can, however, provide more flexibility in terms of management of the business and for sharing profits among owners.
