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Incorporation Law: S-Corps, C-Corps & LLC's Compared

The legal system and tax structure of the USA is very developed and complicated. Navigating the needs of a business is unique to each industry and each individual. The corporate world has adapted to the needs of the market today but evolving into 3 different business structures. S corporation, C Corporation and LLC. Each has a unique advantages and disadvantages over each other to suit the needs of the business owner.

S Corporation:

S Corporations are a business entity that are generally aimed at the smaller corporation. They must have no more than 100 shareholders and each one must be an individual, and not a corporate shareholder. Each shareholder must be a resident or citizen of the USA. These restrictions apply because a S corporation is not taxed at the corporate level as an entity. Rather, the taxes are divided up among the shareholders to be paid on the personal level. This is called pass through taxation because the corporation is a vehicle through which business is done, but the profits and losses are absorbed by the shareholders of the corporation. Most entity formation attorneys recommend S Corp's to Small business.

C Corporation:

C Corporation is what we think of as the traditional corporate structure. The corporate structure is taxed as an intendent entity. This means the money has been taxed already by the time it reaches the hands of the shareholder, so their only responsibility is paying their share of the profit. A C corporation offers a unique opportunity to limit the liability in taxes and lawsuits to the corporate entity, so the shareholders are essentials removed and protected. There is no limit as to the number of shareholders in a c corporation. A unique advantage is the corporation can offer stock options to their employees, and the company is operated by director. This means the selling of the corporation is fairly flexible, as it is an independent structure.

LLC:

A limited liability corporation is the third option. This structure is less formal than other corporation as they are not required to hold annual meetings or keep detailed records of business decisions to report to the shareholders. Like the other corporations however, a LLC does shield personal assets from liability. The tax structure is a pass through like an S corporation, and the individual pays on their personal reports. This means that essentially, they are self-employed and must cover payroll taxes independently as well. Additionally, the restrictions of other corporations are not applied to LCC, for example non-US residents and citizens can be owners of a LLC, and other corporate entities can be owners of an LLC. Local attorneys will help you assess which formation suits the law in your area.

All three options are relatively inexpensive to open and can be done independently, with professional help, or even online. No matter which is best for you, the fact is that creating a business structure adds a level of professionalism and liability protection that cannot be accomplished as an individual.

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