Corporation (for-profit)

C Corporations

Independent legal and tax structures separate from their owners
Help separate your personal assets from your business debts
No limit to the number of shareholders
Taxed on corporate profits and shareholder dividends
Must hold annual meetings and record meeting minutes

S Corporations

Independent legal and tax structures separate from their owners
Help separate your personal assets from your business debts
Owners report their share of profit and loss in the company on their personal tax returns
Limits on number of shareholders, who must be U.S. citizens or residents
Must hold annual meetings and record meeting minutes.

Forming and operating an LLC or a Corporation is a bit more complicated and costly, but well worth the trouble for some small businesses. The main benefit of an LLC or a Corporation is that these structures limit the owners´ personal liability for business debts and court judgments against the business.

An S Corporation is a special form of corporation (Note: The "S" in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is "passed through" to the personal income of its owners (shareholders) in proportion to their ownership interest.

An S Corporation is created by forming a traditional C Corporation and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.

Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.