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Tax Advantages by Business Structure: LLC, S-Corp, C-Corp, GP, SP

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Choosing the right business structure can be one of the most important decisions a business makes. Each business structure has its own advantages and disadvantages related to taxes, liability, and asset protection. This article briefly describes each of these business entities: Limited Liability Corporation (LLC), S Corporation, C Corporation, General Partnership (GP), and Sole Proprietorship (SP).

Legal Business Structure: C Corporation

C Corporations are great for businesses that sell products, have a storefront, have employees, and have significant startup and operational costs. C Corporations are taxed entities. This means that all revenue generated by activities performed under the C-Corp is subject to taxation. They are preferred by foreign investors, and can have a large number of shareholders. C Corporations separate personal assets from business assets. C Corporations have the widest range of tax deductions. They can deduct a number of employee benefits. The biggest disadvantage is double-taxation which can occur if there are profits at the end of the year.

Legal Business Structure: S Corporation

S Corporations are great for businesses that provide services and do not have a large number of employees. S Corporations are not taxed entities. They are pass-through entities in which taxes are applied to wages, incomes, salaries, etc. provided to contractors, employees, and agents. Shareholders must be US citizens or resident aliens. S-Corps are limited to 100 shareholders. S Corporations separate personal assets from business assets. S-Corps do not retain profits at the end of the year. All profits are passed through as investments, salaries, etc. Taxes are applied to each individual.

Legal Business Structure: Limited Liability Corporation

A LLC is great for people who want an entity to hold real estate or other appreciating assets. They are a popular choice for investors and entrepreneurs because of flexible taxation and asset protection. LLCs separate personal assets from business assets and are formed at the state level. Financial, managerial, and operational reporting is less restrictive than S-Corps and C-Corps. A LLC has some flexibility related to tax reporting. It can be treated like a sole proprietor in which all profits are passed through to one individual, or it can be treated like a general partnership in which all profits are passed through multiple individuals.

Legal Business Structure: General Partnership

A general partnership is a legal arrangement in which two or more people agree to share in all assets and profits. They also share in all financial and legal liabilities of a business. General partners have unlimited liability, which means their personal assets are liable to the partnership’s obligations. There is no separation between the business and all individuals involved. General partnerships are not recommended for any purpose.

Legal Business Structure: Sole Proprietorship

Sole proprietorship is the simplest and easiest business structure. Sole proprietorship is not a legal entity. It just means an individual owns a specific business. That owner is responsible for all business assets and liabilities. There is no separation between personal assets and business assets.

The LLC is the best recommendation for most small businesses. There is a separation between personal and business assets, which is not available for General Partnerships and Sole Proprietorships. There are less requirements to setup and operate an LLC as compared to the S-Corp and C-Corp.

1040TaxBiz does not give legal advice. It provides information based on decades of experience operating a successful business. If you want help starting a business, contact 1040TaxBiz.

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