General Corporation (“C” Corp)
This type of entity is the most widely used corporation by both small and large businesses. Its structure is suitable for a company which is intended to have any number of shareholders, even just one or two. Shareholders own the corporation but their assets are protected from creditors of the corporation, their liability generally being limited to the amount they have invested in the corporation. Your corporation can pay you a reasonable salary for your services. Although you have to pay income taxes on the salary, your corporation may deduct the salary as a business expense, thereby avoiding payment of corporate taxes on it. Net profits can be taxed at a rate as low as 15% for the first $50,000 in net profits which can easily be lower than an individual’s income tax rate. A corporation (either “C” or “S”) can fully deduct employee health care costs and corporate retirement investments like pension and profit-sharing plans. Accident and health insurance premiums paid by an “S” corporation for a more than 2% shareholder employee are deductible by the corporation AND are included in the shareholders gross income. A limited amount, currently 40%, of the health insurance premiums may be deducted by the shareholder employee on page number one on form 1040. Meals and entertainment which are corporate-related are partially deductible, too. Equipment up to $18,500 in 1998 may also be generally written off as an expense. You may also take income from your corporation and avoid double taxation by buying land, equipment or a building and leasing it back to your corporation. The rest is deductible to your corporation provided it’s reasonable and you pay tax on the rental income. Corporations from the one person-consulting firm to the huge Fortune 500 conglomerate choose to operate under this fundamental structure.
This type of corporation is well suited for businesses which plan to engage in charitable, religious, educational or scientific activities deemed socially beneficial. Net income of non-profit corporations must be applied to the attainment of the not-for-profit purpose and not to enrich the individual members, officers or directors of the corporation. Non-profit corporations achieve 501 (c) (3) status, or tax-exempt status, by filing an Application for Recognition of Exemption with the IRS. You should consult your lawyer or accountant for help with the Application, but we can get you started by filing your non-profit certificate of incorporation today!
Many business owners find the S corporation especially attractive in that all earnings or losses are “passed through” directly to them on a K-1 for their personal income tax return. As a result, it avoids the double taxation feature of general business corporations which tax profits at the corporate level and dividends at the shareholder level. If owners have enough “basis” in their S corporation stock, losses passed through on an individual’s return can be used to reduce other ordinary income and thus the owner’s overall tax liability where the owner is actively involved in the business. Certain requirements must be met before qualifying for S corporation status. We strongly recommend that you consult with your tax advisor before electing S corporation status. To obtain the special S corporation tax status, the corporation must have all shareholders sign IRS Form 2553. This form must be filed with the IRS within 75 days of the date of incorporation. Registered Agents can assist you with this filing.
Limited Liability Corporation (LLC)
This type of business entity has emerged as an exciting and new alternative to corporations or partnerships. The Limited Liability Company (LLC) combines features of both corporations and partnerships: the corporate advantage of limited personal liability coupled with the single-level tax advantages of partnerships. The LLC is now recognized in all 50 states and the District of Columbia. The LLC is a highly flexible business entity created in response to the demand for an alternative to traditional forms of business.