Business Entities

There are many different ways to structure your company. But what is the best way for you? Here are the different types of organizations, and the tax benefits to each:

S Corporations

S corporations generally pay no tax, and income and losses are passed through to shareholders. The permissible number of shareholders is 100, and eligible members of the same family may be treated as a single shareholder. Estates, certain trusts, and tax-exempt organizations may also be shareholders.
S corporations avoid the double taxation inherent in C corporations, but they must follow strict rules. S corporations that were previously C corporations can trigger corporate-level tax in certain situations.

For tax years 2009 and 2010, the American Recovery and Reinvestment Act of 2009 (ARRA) shortens, from ten to seven years, the amount of time that an S corporation that has converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion.
S corporations may own any percentage of the stock of other corporations. Fully owned subsidiaries may also elect "S" status, but the qualified subsidiary is a disregarded entity for tax purposes.

C Corporations

C corporations are taxed as separate entities from their shareholders. The corporation pays taxes, and you pay taxes as an employee—the so-called "double taxation." Investors are taxed on the dividends they receive.

C corporations can generally offer more fringe benefits than S corporations and partnerships. However, C corporations may receive more IRS scrutiny. Salary paid to you and other shareholders must be reasonable, or a portion of it may be reclassified as a nondeductible dividend payment. If earnings are accumulated beyond the reasonable needs of the corporation, an additional tax of 15% will be imposed on these earnings.

Partnerships

Partnerships avoid corporate double taxation and usually allow more flexibility in distributions and allocations of tax items than either a C or S corporation.
In particular, family limited partnerships can offer a number of benefits. You can split income with your children, realize estate tax savings, and continue to control the assets you transferred to the partnership. However, family limited partnerships must be carefully structured, as they are often closely monitored by the IRS.

LLCs & LLPs

Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) generally offer limited liability and flow-through taxation.
The structure of the LLCs and LLPs is flexible, which allows any entity, including corporations, to be an owner. Also, special allocations of income and losses, as well as investment in other entities, are not limited.

Sole Proprietorships

If you are a sole proprietor, your personal tax return is your business return. If you risk substantial business liability, consider some form of incorporation, LLC, or LLP to protect your personal assets.