When incorporating your business, you will need to decide which form it should take. Each type of corporation offers different tax treatment and formation requirements. Along with the freedom to choose the type of organization that works best for your company, you also can choose the state in which you incorporate. You are not required to file your articles of incorporation in the same state in which the business is located.
C corporations offer liability protection for their shareholders. Each shareholder is only financially liable for the amount he has invested in the company. The main drawback to organizing as a C corporation is double taxation of income. The company must file a corporate tax return and pay the appropriate taxes, and shareholders also must pay individual income tax on any dividends they receive. To create a C corporation, you file articles of incorporation with your local secretary of state's office and pay the applicable filing fees.
S corporations pass their income through to their shareholders to eliminate the double taxation problem that C corporations face. The S corporation has the flexibility to adjust its officers' salaries to minimize Medicare and Social Security taxes. S corporations are subject to the same filing requirements as C corporations when forming, but they are not required to use the accrual method of accounting unless the company holds inventory. To be taxed as an S corporation, the company must file Form 2553 with the Internal Revenue Service. A Schedule K-1 must be issued annually to report each shareholder's share of the corporation's income and expenses.
Limited Liability Company
Limited liability companies are similar to corporations in the liability protection they provide their shareholders. LLCs require less paperwork and reporting to government agencies than other forms of organizations and offer more flexibility in ownership structure. The company can choose the profit-sharing arrangement that best suits its owners. Income is passed through to the shareholders via Schedule K-1. No annual board meetings or minutes are required.
Corporations that perform charitable activities may be able to qualify as nonprofits under Section 501(c) of the Internal Revenue Code. The corporation may not distribute earnings to its members, officers or directors. It may earn income from activities not related to its main charitable purpose, but those earnings are taxable. The company must file Form Form 8718 and Package 1023 to apply for nonprofit status. Upon approval, nonprofit corporations are required to report their annual income on Form 990 and pay tax on any nonexempt income.
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