Most common types of business entities

Corporations

Limited Liability Companies (LLC)

Business entities and Tax Choices

Business Corporations

default tax status
  • “C” Corporation

optional tax status
  • “S” Corporation subject
    to restrictions
All US corporations have to file at least a federal tax return each year. Many states also require an annual tax return as well.Business corporations are always a C corporation at the time of formation. If all the shareholders qualify, and all the shareholders want to, the corporation can elect to become an “S” corporation . There are certain benefits and costs for making this election.

Limited Liability Companies (LLC)

default tax status
  • One Member Sole Proprietorship
  • Two or More Members Partnership

optional tax status
  • “C” Corporation
  • “S” Corporation subject to restrictions
Flexible & complicated. Under the default rules, an LLC with one member does not exist for federal tax purposes, and an LLC with more than one member is a partnership. If it files an IRS form, an LLC can become a corporation (S or C) for tax purposes. Some states follow the federal rules, and many do not.

When not to use

When to Avoid a Corporaiton

Don’t use a corporation for holding real estate. Don’t use a corporation if you hate formalities.

When to Avoid an LLC

Don’t use an LLC when you plan to go public in the future.Don’t use an LLC for starting an active trade or business in the US when you are a non-resident entrepreneur or company, unless you love international tax complexities.