Incorporate a Business

Limited Liability Company or LLC

LLCs shield the owners, who are called members, from being personally liable for actions of the LLC. LLCs also provide flexibility in management and offer the benefit of pass-through taxation.

Why choose an LLC?

Consider forming an LLC if you are fearful of personal risks to lawsuits arising from your business. For example, if you decide to open a storefront business that deals directly with the public, you may fret that your commercial liability insurance won’t fully cover your personal assets from potential slip-and-fall lawsuits or claims by your vendors for unpaid debts. Running your business as an LLC may ease your mind because it instantly offers you an additional layer of security against these and other possible claims against your business.

Learn more about the advantages of LLC formation.

S Corp

The S corporation business entity type is a corporation that comes with a special advantage: it has the limited liability of a corporation, but without the "double taxation" of income passed through to the shareholders. Prior to the acceptance of the LLC, the S corporation was the best vehicle to shield the owners while avoiding double taxation. The "S corporation advantage" allows a business owner to use the business losses—such as those incurred during the startup phase—on their personal returns as deductions. S corporations can also provide savings for their owners on self-employment or Social Security/Medicare taxes.

Why choose an S corporation?

An S corporation allows the owners to offset non-business income with losses from the business, unlike a C corporation which is a completely separate tax entity. When compared to an LLC, the S corporation enables an owner to characterize a portion of income as “dividend,” rather than “earnings” that are subject to employment taxes.

Let’s say Luke and Sam each own a company and each receive $90,000 in income from the business. Luke’s business operates as an LLC, while Sam uses an S Corporation for her business structure. How does the type of business structure affect their total tax picture? Both will pay income tax on income that they receive from the operation of the business. However, Luke must pay self-employment tax (13.3% in 2011) on the entire $90,000 distributed to him—although he will get a tax credit for one-half of that self-employment tax amount. Now Sam’s situation is different. Because she runs her business as an S corporation, she can split her $90,000 between a reasonable salary and a dividend from the corporation. Sam elects to receive $60,000 in salary, which will be subject to 13.3% FICA taxes (in 2011) and $30,000 as a dividend, which isn’t subject to either SE tax or FICA tax. Luke’s total tax liability on the $90,000 is $26,722 ($12,434 in SE tax, plus $14,288 in income tax.) Sam saves $3,742 on her total tax bill. Her total tax liability is $22,980 ($7,980 of FICA paid by the corporation/withheld from her salary, plus $15,000 in income tax.)

Learn more about the advantages of forming an S corp.

C Corp

C corporations are the most common type of corporation. They offer more flexibility than S corporations relative to the number of owners (shareholders) they can have and who can be an owner. Because of a pronounced ability to deduct employee benefits, C corporations are often preferred by developing businesses.

Why choose a C corporation?

C corporations offer more flexibility than S corporations when it comes to the number of owners (shareholders) they can have as well as who can be an owner. Plus, the owners can hold different types of stock interests (such as preferred versus common stock.) This is one reason why venture capitalists choose C corporations when they offer funding to a business. Investors are drawn with the prospect of dividends if the corporation makes a profit. A C corporation can also retain and accumulate earnings (within reasonable limits) from year to year.

Learn more about the advantages of forming a C corp.

Nonprofit

A nonprofit corporation is one that is formed for purposes other than making a profit. Nonprofit organizations come in many forms. Examples include churches, soup kitchens and hospitals. Forming a nonprofit corporation helps you avoid personal liability for the debts of your organization. The principal advantage to nonprofit status for an organization is that it will be qualified to receive both private and public grants.

Why form a nonprofit?

While incorporating your not-for-profit venture is not a requirement, it lends more credibility to your organization. Also, in order to become tax-exempt, you must incorporate and also file Form 1023 with the Internal Revenue Service. A few states require a separate file for state tax-exempt status as well.

Learn more about the advantages of forming a nonprofit corporation.