So you're getting ready to start your company and you want to formalize your organization but, you're not quite sure what type of corporation you'd like to form.
Well, it all depends on how you plan file your taxes, whether or not you need tax shelters or what your immediate earning potential is. C-Corp Protects the owners or shareholders assets from creditor claims. Income and expenses are taxed to the business and not the individual. Profits are distributed to shareholders as dividends that they have to pay taxes on. Businesses that choose this option usually: Want to keep company earnings in the business. Want to be able to provide stock options to employees. Expect the business to own real estate. Want to lower their risk of IRS audit exposure. LLC (Limited Liability Company) LLC's provide personal liability protection for the corporation owner. Business income and expenses are reported on the owners personal tax return. Businesses that choose this option usually: Anticipate loss in earnings for at least two years that you can't pass through to themselves and other owners. Management, Profit sharing and Accounting flexibility is desired. You want to avoid rigorous formalities like board meetings and ongoing documentation requirements. S-Corp In an S-Corp, profits, losses and other tax items pass through your personal tax returns. Businesses that choose this option usually: You want the benefits of a corporation type business and of pass through taxation. Flexibility of accounting methods, and salary setting. Want lower risk of IRS audit exposure. All of these options offer the owners personal liability protection. They give the opportunity to raise venture capital easier. Provides access to tax deductions, credibility with potential customers, vendors and partners that sole propreitorships may not. The key differences are in how the owners of the businesses are affected. LLC members are self-employed individuals who owe Social Security and Medicare taxes, paid by self-employment tax on their share of business net income. S corporation shareholders are employees of their corporation so Social Security and Medicare (FICA) taxes apply to compensation they receive, but not to distributions they receive.
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