Popular Forms of Business Formation

When considering how to incorporate a new business, Canner, Brody & Yan, LLC can explain the unique tax and legal implications. Our professional business formation services include set-up of new business entities, assisting with articles of incorporation and article of organization.

We rely on our extensive experience and continual education to determine the optimal route for business formation and solution for your company. At Canner, Brody & Yan, LLC, we assist our clients in selecting the appropriate business entity, carefully selected based on each individual business’s requirements, situation and business identity.

Some common forms of incorporation are:

Limited Liability Company (LLC)

LLC is the United States specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. The LLC protects the owner(s) or member(s) from personal liability of the company’s financial obligations, but it is usually treated as a non-corporate business organization for tax purposes.

Limited Liability Partnership (LLP)

An LLP combines characteristics of partnerships and corporations. As in a corporation, all partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees. In an LLP, all partners have the same general management responsibilities. Many professionals form LLP’s to protect partners from malpractice claims against other partners.

All of the profits in a LLP would be split amongst the members. The tax liability falls on the individual members, not the LLP itself. Most members are likely to be self-employed, so all income should be declared via self-assessment. If an LLP member is another business, they will be liable to pay corporation tax on any income they receive from the LLP.

C-Corporation

A legal structure that businesses can choose to organize themselves under in order to limit their owners’ legal and financial liabilities. The C-Corporation designation merely refers to a standard, general-for-profit, state-formed corporation. The “C” comes from subchapter C of the Internal Revenue Code which controls the method of taxing profits and operations. Generally the C-Corporation is taxed on its own profits, and then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income at the individual shareholder’s tax rate. This creates a “double tax” on the same income. With proper tax planning, most small corporations avoid paying dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation, which in result, decreased or eliminated the corporate level profit.

S-Corporation

The S-Corporation follows the same state formalities as does a C-Corporation, such as filing Articles of Incorporation and paying state fees; however, an S-Corporation must make a special tax election. The “S” comes from the subchapter S of the Internal Revenue Code, which controls the method of taxing profits and operations. S-Corporations are not subject to corporate income tax on the profits of the company. All profits/losses are passed on directly to the shareholders of the company. The shareholders file individual tax returns and pay income tax on whatever share of profits they receive from the business. If the business has more than one shareholder the business must file an informational tax return to provide details of the corporate income of each shareholder.

However, a company must meet strict legal requirements to qualify as an S corporation.