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This allows a company to issue shares and pass on profits while limiting the liability of the shareholders and directors. There is no one best option among the possible business or tax structures. The choice should be based on the specific situation of each business, and business owners should consult with legal and tax professionals during the process. Plenty of businesses that begin as partnerships and LLCs eventually transition to C-corp status. Regardless of what you plan for your business, it’s important to have a clear understanding of each option so you can weigh pros and cons carefully. “Limited liability companies” (LLCs) differ from C corporations as well; providing the legal protections of corporations, but serving as “pass through” instruments, like S corporations or sole proprietorships.
For the remainder of this article, we will focus on how the corporation itself is taxed. An S-corp is a pass-through entity for tax purposes, which means shareholders report their share of the business’ income and losses on their personal tax returns by filing Form 1120S. Generally, taxes are the biggest and most important difference between S-corps and C-corps. C-corps are subject c crop to corporate tax rates; S-corps allow for pass-through taxation, meaning owners report the business profits and losses on their personal income tax returns. No, a C corporation and an LLC are not the same, they are two completely different business structures. A C corporation is a legal entity that is separate from its shareholders and is taxed separately from its owners.
How to form a corp
Be sure to consult a qualified lawyer or tax pro to determine how an S-corp could affect your taxes. The most basic difference between S-corporations and C-corporations is formation. We believe everyone should be able to make financial decisions with confidence. Although treatment of gains in an S corporation can be handled differently, sales of appreciated assets can create a significant tax implication when the gain is locked inside a C corporation.
Plus, incorporating your company sends a positive sign to investors and customers about the legitimacy of your business. One downside of designating your business as an S corporation, compared to only an LLC, is that it does require additional paperwork. We need to start with an explanation of the S-corp because the S-corp is technically not a business structure—it’s a tax status. In 1958, Congress created the S corporation, also called the small business corporation, so that smaller businesses could get similar tax advantages as a corporation, but without the double taxation.