Corporation type (Sole proprietor, LLC, S Corp, C Corp, B Corp)
If you’re opening a new business, what is the best choice for tax efficiency and legal protection for you and your investors or partners? For those who have not yet incorporated their business, this might be your best chance to plot a course towards the future that means paying less taxes and reaping sizable benefits that will allow for more sustainable growth in the future. In this article we’ll cover the five most common corporation types (Sole proprietor, LLC, S Corp, C Corp, B Corp) that you can choose from and how they benefit you when it’s time to turn in your taxes.
What’s Your Preferred Tax Structure?
Since different tax structures have different parameters for filing their taxes, it’s important to figure out which one will be the most beneficial for you and your business.
Sole Proprietor
A sole proprietorship refers to any business with a single owner. If you own a small business and have all the authority over what happens to your company and how to run it, you are the sole proprietor of that business.
Over 70% of U.S. businesses are owned and operated by sole proprietors or sole traders. Many entrepreneurs love sole proprietorships because of the ownership they have over business decisions and revenue and how easy and cost-effective they are to set up.
One of the most significant benefits of making your business a sole proprietorship is simplicity. It’s relatively quick and inexpensive to start your business officially. You can also avoid the bureaucracy and negotiation of corporate ownership. Whatever you want to do with your business, the power is in your hands to decide and make it happen.
The most obvious downside of a sole proprietorship is the liability. The business doesn’t exist apart from you as an individual, so if your business goes into debt, you go into debt. If someone sues your business, they’re suing you directly. LLCs and other corporation types give you some degree of protection from financial and legal risk.
Over 70% of U.S. businesses are owned and operated by sole proprietors or sole traders. Many entrepreneurs love sole proprietorships because of the ownership they have over business decisions and revenue and how easy and cost-effective they are to set up.
One of the most significant benefits of making your business a sole proprietorship is simplicity. It’s relatively quick and inexpensive to start your business officially. You can also avoid the bureaucracy and negotiation of corporate ownership. Whatever you want to do with your business, the power is in your hands to decide and make it happen.
The most obvious downside of a sole proprietorship is the liability. The business doesn’t exist apart from you as an individual, so if your business goes into debt, you go into debt. If someone sues your business, they’re suing you directly. LLCs and other corporation types give you some degree of protection from financial and legal risk.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is taxed as a partnership (more than one owner) or sole proprietorship (one owner), unless the owners elect to be taxed as a Corporation. The LLC operating agreement includes management provisions and buy-sell provisions, making the LLC a popular entity to own real estate, boats, and airplanes, and a popular entity for foreign citizens to render services or sell products.
A one-member LLC is typically taxed as a “disregarded entity”; that is the one-member LLC is effectively taxed as a sole proprietorship. All income and expenses “pass through” to be reported on schedule C of the individual tax return of the member’s personal tax return. For multi-member LLC’s, the net income also “passes through” to the individual owners based on a percentage of ownership. The members then report profits and pay taxes on their individual tax returns. Owners are responsible for normal income tax and self-employment taxes.
An LLC gives you the best of both worlds: the personal liability protections of a corporation and the pass-through taxation of a sole proprietorship or partnership. Forming an LLC means you can rest assured knowing:
A one-member LLC is typically taxed as a “disregarded entity”; that is the one-member LLC is effectively taxed as a sole proprietorship. All income and expenses “pass through” to be reported on schedule C of the individual tax return of the member’s personal tax return. For multi-member LLC’s, the net income also “passes through” to the individual owners based on a percentage of ownership. The members then report profits and pay taxes on their individual tax returns. Owners are responsible for normal income tax and self-employment taxes.
An LLC gives you the best of both worlds: the personal liability protections of a corporation and the pass-through taxation of a sole proprietorship or partnership. Forming an LLC means you can rest assured knowing:
- Your personal assets are safe if you get sued.
- You’re free to manage your business how you’d like.
- Includes control measures to eliminate or reduce such exposures
S Corporations
The S corporation is an entity that has elected a special tax status with the IRS and therefore has some tax advantages. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met.
Just like LLCs, S corps are also pass-through taxation entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
A few benefits of an S corp is that they are not required to pay a corporate-level income tax which means that any distribution of income to the shareholders is only taxed at the individual level. Another recent benefit from The Tax Cuts and Jobs Act of 2017 also gave eligible S corp shareholders a deduction of up to 20% of net “qualified business income,” thereby making it an even more profitable gateway for business owners.
Just like LLCs, S corps are also pass-through taxation entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
A few benefits of an S corp is that they are not required to pay a corporate-level income tax which means that any distribution of income to the shareholders is only taxed at the individual level. Another recent benefit from The Tax Cuts and Jobs Act of 2017 also gave eligible S corp shareholders a deduction of up to 20% of net “qualified business income,” thereby making it an even more profitable gateway for business owners.
C Corporations
The C corporation is the standard (or default) corporation under IRS rules. The majority of larger businesses in the United States are structured as C Corporations, although a C Corp could, theoretically, consist of just one person.
C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal taxable income. Corporate income tax is paid first at the corporate level and again at the individual level on dividends.
Corporations can retain some of their profits and earnings as part of their operating capital, this can shelter some of the profits from taxation. Unlike individuals, C Corporations must file a designated tax form with the IRS, which is called IRS Form 1120. Additionally, C Corporations have their own tax rates.
C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal taxable income. Corporate income tax is paid first at the corporate level and again at the individual level on dividends.
Corporations can retain some of their profits and earnings as part of their operating capital, this can shelter some of the profits from taxation. Unlike individuals, C Corporations must file a designated tax form with the IRS, which is called IRS Form 1120. Additionally, C Corporations have their own tax rates.
Certified B Corporations
A B-corporation is a for-profit company that commits to transparency and accountability while addressing social and environmental issues. B corporations can become certified by meeting certain standards related to those goals. These entities serve a dual purpose of making a profit for shareholders while adhering to socially beneficial practices. These practices can include environmental protection, employee welfare, promoting volunteerism, or a variety of other social welfare initiatives.
Registering as a B corp can save your company money in the long run if you’re smart about your tax planning. You’ll have access to B corp community data, which provides you access to learn the most cost-effective means to be sustainable. Plus, the certification process helps companies identify needless and wasteful spending.
For tax purposes in the eyes of the IRS, B-Corporations will need to be taxed as either a C-corporation or an S-Corporation (if elected). While B-Corporations hold various social and other transparency metrics, they will still be taxed as either a C- or S-corp.
Registering as a B corp can save your company money in the long run if you’re smart about your tax planning. You’ll have access to B corp community data, which provides you access to learn the most cost-effective means to be sustainable. Plus, the certification process helps companies identify needless and wasteful spending.
For tax purposes in the eyes of the IRS, B-Corporations will need to be taxed as either a C-corporation or an S-Corporation (if elected). While B-Corporations hold various social and other transparency metrics, they will still be taxed as either a C- or S-corp.
Which Corporation Type Fits Your Needs?
Whichever business entity you decide is most appropriate for your company’s vision, you hope to realize, make sure you’re confident before you move forward to the next step. When you’re putting your money and effort on the line for something you’re passionate about, you have to know precisely what you’re working toward.
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- March 28, 2023
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