Simplifying Accounting

In the U.S., there are several types of business entities, each with its structure, tax treatment, and benefits. Here’s a brief explanation of the main types of companies and their tax implications:

Limited Liability Company (LLC)

Structure: A flexible entity that can have one or multiple owners (members). Provides the liability protection of a corporation and the tax benefits of a partnership.

Tax Benefits: An LLC can choose to be taxed as a sole proprietorship, partnership, or corporation. Default tax treatment is a pass-through, meaning the business itself is not taxed; profits and losses are passed on to the owners. LLCs are subject to self-employment taxes on profits unless electing to be taxed as an S corporation.

S Corporation (S Corp)

Structure: A corporation that passes corporate income, losses, deductions, and credits to shareholders for federal tax purposes.

Tax Benefits: Avoids double taxation (corporate and individual) because income is passed through to shareholders. Shareholders are taxed only on personal income. S Corps also provide the ability to reduce self-employment taxes by taking a reasonable salary and distributing remaining profits.

C Corporation (C Corp)

Structure: A legal entity separate from its owners, with an unlimited number of shareholders.

Tax Benefits: Offers the ability to raise capital easily by issuing shares. Corporate tax rates may be lower than personal tax rates at higher income levels. Owners can deduct benefits like health insurance. Subject to double taxation—corporate income is taxed, and then dividends distributed to shareholders are taxed again on their personal returns.