State Incorporation Services (LLC, INC.)

Choose the Entity You’d Like to Form


LLC is the most popular entity type for small businesses, but it’s not for everyone. We’ve provided descriptions of some common entity types to help you choose.

What is a limited liability company? A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a “pass through” entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are “passed through” to the owners, who must then pay tax on their share of LLC income.

canstockphoto19014528How does an LLC compare to a C Corporation? For many small business owners, a Limited Liability Company (LLC) offers advantages over a “C” corporation (also known as a “general” corporation). Creating an LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of a corporation.

The IRS taxes the profits of a C corporation at corporate tax rates. Then, if the C corporation pays dividends to shareholders, the IRS taxes those dividends a second time at the personal income tax rates of the shareholders. The LLC business structure avoids this “double taxation.” The Internal Revenue Service (IRS) does not consider an LLC itself a taxable entity. Instead, the company’s earnings “pass through” to the owners, who report their share of profits or losses on their individual tax returns.

Small business owners who want the flexible structure of an LLC but the advantages of corporate taxation can elect corporate taxation for their LLC. To elect corporate taxation, owners file Form 8832, “Tax Classification Election,” with the IRS. Electing this status may also make an LLC eligible for certain deductions available only to corporations. For specific guidance, small business owners should consult their accountant or tax advisor regarding this election.

 


Limited Liability Company (LLC):

The most popular entity type for small businesses. Benefits of an LLC include:

  • Limited liability for business debts and obligations
  • Pass-through taxes and enhanced credibility
  • No residency requirement

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S Corporation:

Avoid “double taxation” of corporate income and shareholder dividends with this federal tax status. Benefits of an S Corp include:

  • Limited liability for directors, officers, shareholders, and employees
  • Pass-through taxes and once-a-year tax filing requirement
  • Investment opportunities and perpetual existence

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C Corporation:

The most common type of corporation in the U.S. Benefits of a C Corp include:

  • Limited liability for directors, officers, shareholders, and employees
  • Enhanced credibility and certain tax advantages
  • Unlimited growth through the sale of stock and perpetual existence

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Nonprofit Corporation:

Ideal for organizations involved in educational, scientific, religious, or charitable endeavors. Benefits of a nonprofit corporation include:

  • Possible exemption from certain property, federal, and state taxes
  • Official nonprofit status to attract potential donors
  • Donations to the nonprofit corporation may be tax-deductible

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Professional Corporation:

Popular in accounting, law, medicine, architecture, engineering, and other professional fields. Benefits can include:

  • Reduced liability
  • Perpetual existence, even if the owner leaves the company
  • Certain tax advantages, including tax-deductible business expenses

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Professional Limited Liability Company

Popular in accounting, law, medicine, architecture, engineering, and other professional fields. Benefits can include:

  • Reduced liability
  • Pass-through taxes and perpetual existence
  • Certain tax advantages, including tax-deductible business expenses

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finalIf you have more questions about which entity is best for you and your business, contact Liberty (215) 709-7070 and speak with our team, we’ll help guide you in the right direction.

 

Author: Taylor

Taylor M. Fletcher, ​is the Founder and Principle of Liberty Licensing & Consulting, LLC.