There are basically three types of corporations in the business world; C corporation, S corporation and LLC. All businesses have to first become a C corporation before eventually choosing its final metamorphosis. Let us begin the discussion with S Corporation. The S corporation is a corporation that eliminates any chance of having double taxes on the running of the business.
In the S corporation, all its profits are taxed to the shareholders of the business and to the business owners, with no additional federal corporate taxes. One just has to pay an annual tax return through the form 1120S. The income, profits, expenses and losses of the S corporation are all disclosed in this form.
Shareholders of the S corporation are issued separate forms called the Form K-1. In this form, the income that the shareholders received through the corporation and its tax returns are reported. Employees of an S corporation are also taxed with their taxes getting filed with the company.
It is necessary for the S corporation to file their tax returns, with deadlines being met punctually. If the deadline is not met for some reason or the other, the business is offered an extra six months’ time to file taxes. If once again there is another delay, the business is offered the choice of selecting S corporation status for the following year. For a business to elect for S corporation status, its shareholders, both present and prospective have to give consent. Without any consent, the election of S corporation is considered invalid.
On the other hand, LLC is basically the acronym for Limited Liability Company, or Limited Liability Corporation, which has much compensation on tax advantages. While corporations offer attractive limits on personal liability and partnerships offer better tax advantages, the limited liability company works on a combination of these features. In the process, the LLC basically offers protection against any personal liability with a lot of tax advantages.
An LLC is preferred over an S or C corporation not only for these points, but also because they are more flexible than the corporations. In addition to this, all legalities that are connected to the running of the LLC are less formal. This in turn leads to a LLC having a tax advantage.
In terms of federal taxation laws, the LLC exercises flexibility in accessing tax advantages. With more than a partner in the firm, the firm is considered a partnership while multiple owner LLCs are treated as either an S or C corporation. And single owner LLCs are considered either as a sole proprietorship or as a C or S corporation. The main tax advantages of an LLC are owing to the fact that it is able to avoid double taxation and that its dividends are not taxed. In an LLC, its income is forfeited on initial taxation and only each member is taxed on individual allocations. However, some LLCs tend to have franchise taxes on them or may have some annual fees to be paid.