Subchapter or Small Business Corporation (S Corporation or S Corp)

• S Corps are formed and regulated on a state level.
• The liability of the S Corp and the personal liability of the owners and investors are separate.
• The liability of the owners and investors in an S Corp is limited only to the value of their investment.
• The owners of a corporation are not personally liable for business debts, claims, or other liabilities.
• There are some more legalities, rules, and compliance for an S Corp than an LLC.
• An S Corp has a slightly more complex corporate structure.
• S Corps are limited to having 100 shareholders.
• Running an S Corp is simpler and easier than running a C Corp.

The cost and policies governing an LLC do vary from state to state. Check out our LLC State Information resource for additional info on your state.

S Corporation Taxes and Tax Returns

Unlike traditional C Corporations, the S Corporation does not need to pay corporate income tax. The S Corporation is a separate tax designation recognized by the IRS. Similar to the LLC, the net profit or loss generated by an S Corporation will flow through to the personal income tax returns of the shareholders and owners, and be subject to tax there.

As with LLCs, an S Corp will have to pay certain other types of taxes like payroll, property and sales tax on business purchases.

Forming an LLC but Paying Tax as an S Corp

When you create an LLC, you may have the option to choose to be treated as an S Corp for taxation purposes. This takes advantage of both business types, as follows:

• The rules and regulations for running an LLC are less onerous than running an S Corp.
• There may be tax advantages to being taxed as an S Corp, specifically around owners and members taking money out of the business.
• You can choose to pay yourself a “reasonable” salary and deduct monies above that as share dividend income. That additional income would not be subject to self-employment tax, although it would still be subject to personal income tax.

If you’re interested in how to save additional money on taxes by filing your business as an S Corporation, check out our S Corporation Tax Calculator.

The C Corporation

A C Corp, also known as a C Corporation, is a type of business entity that is formed and regulated on a state level. It is created by filing “Articles of Incorporation” with the secretary of state within the state of incorporation. It is the most formal type of company and a corporate structure. The policies and cost of creating a C Corp vary from state to state. Factors affecting whether you would want to create a C Corp include:

• A C Corp has limited liability, so the investors and owners of a C Corp are not generally liable for business debts and other liabilities.
• Ownership of a C Corp is determined by who owns stock in the company.
• A C Corporation must issue stock.
• A C Corporation must hold an Annual General Meeting.
• The ownership of a C Corp can be fluid and transferred, depending on who holds stock at a particular moment in time.
• Stocks in a C Corp can be bought and sold on a public stock market if the C Corp holds an “Initial Public Offering (IPO)” where it makes it stocks available to the public.
• A C Corp is required to have a board of directors.
• A C Corp can raise more finances by issuing stock.
• A C Corp is required to meet numerous rules and regulations.
• Money earned by a C Corp may be subject to “double taxation.”

How Taxes Work In A C Corp

Unlike the the Limited Liability Company and the S Corporation, a corporation is required to file a corporate tax return and pay corporation taxes on any profits. When those taxes are paid to shareholders as dividends, they will also be subjected to taxation on that individual’s tax return. This is known as “double taxation.”

C-Corporation Tax Rates

C-Corporation tax rates are as follows:

Profit up to $50,000 —— 15%
$50,000 – $75,000 —— 25%
$75,000 – $100,000 —— 34%
$100,000 – $335,000 —— 39%
$335,000 – $10,000,000 —— 34%
$10,000,000 – $15,000,000 —— 35%
$15,000,000 – $18,333,333 —— 38%
More than $18,333,333 — 35% —— 35%

The Nonprofit Corporation

A Nonprofit Corporation is a type of corporation that donates any revenues generated to achieve a specific goal that is of public benefit. Nonprofit corporations are allowed to create profits, however those profits must be used to preserve the existence and expansion of the corporation.

In the United States, a nonprofit corporation is formed by filing articles of incorporation in the state in which it will operate. Incorporating the nonprofit creates a legal entity and enables the organization to be treated as a corporation by law, granting it the same rights and privileges afforded to for-profit corporations.

How Taxes Work In A Nonprofit

Unlike the the Limited Liability Company and the S Corporation, a corporation is required to file a corporate tax return and pay corporation taxes on any profits. When those taxes are paid to shareholders as dividends, they will also be subjected to taxation on that individual’s tax return. This is known as “double taxation.”

Fedaral tax
Sales tax
Property tax
Payroll tax
Taxes on income unrelated to the main purpose

A Note on Sole Proprietorships and Partnerships

Before closing, a word on sole-proprietorships and partnerships: although these may not be “formal” business entities, some people may choose to complete work as a sole proprietor or partner. In these cases, there’s generally no separate business entity — the business and the proprietor (or partnership) are effectively one and the same. This means all income, expenses and other financial matters would be reported on an individual’s personal tax return, and they’d pay tax accordingly. It also means there’s no separation for areas like personal liability.

We always recommend setting up a formal business entity — it keeps everything neater, removes personal liability for your business, and may have several tax advantages. Incorporate your business today using Incfile’s three easy steps to online business formation.