In doing so, the business does not have to pay corporate taxes in addition to member taxes, thereby avoiding the “double taxation” corporations endure. However, S corps are pass-through entities, meaning profits and losses pass through the business and to its shareholders, who must report them as income on their personal tax returns. A C corp, in contrast, is completely separate from its shareholders and must pay its own taxes. Then, when profits are dispersed to its shareholders as dividends, they too must pay personal income taxes on those profits.
Shares are legal documents that give the ownership of a corporation to the shareholder. An S-corporation is similar to a C-corporation in that it registers with the state as an entity, gives shares to owners and has a board of directors. The difference between a C-corporation and an S-corporation is that an S-corporation elects to have revenues passed down to the owners.
But an LLC can also elect to be taxed as a C corp. or–if it qualifies–an S corp. LLCs can be managed by their members (owners), or they can be managed by one or more managers, with the members acting more like passive investors. The people running an LLC–whether members or managers– don’t have to adhere to traditional roles or titles like CEO or Vice President, but can create a management structure that works for their business needs.
In contrast, corporations operate with a much stricter management structure, with a board of directors overseeing the business and officers who manage daily operations. Paperwork and record-keeping for shareholder and director meetings is extremely important with corporations. A general partnership is an agreement between two or more individuals who agree to share in the profits, losses and legal liabilities of a company. In the general partnership, each partner is responsible for filing their own taxes based on the revenues passed to them through the partnership. There is no limit to their personal liability, meaning that the partners have unlimited responsibility for company debts and legal liabilities.
Is a corporation right for you?
LLCs aren’t tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations. The problem with the above two types of businesses corporation pros and cons is that they are not limited liability businesses. This means that in case these businesses wind up, their owners will be fully liable to pay the obligations of the business.
Owners should sign documents and contracts on behalf of the company, not in their own personal capacity. For corporations, additional documentation needs to be maintained as well. This includes corporate minutes, details on annual shareholder meetings, and information on its board of directors. One of the most important things you can do as an owner is to limit your personal liability for business debts and liabilities. From there, you want to consider how the profits are distributed and thus taxed. If profits are passed through, that means that you add the profits to your personal tax return.