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For many businesspeople, the choice of “business entity” comes down to a choice between  the Limited Liability Company (LLC) and S-Corporation.

While quite similar in many respects, LLC’s and S-Corporations both have advantages over one another.

For example, while LLCs and S-Corporations share the same “separate entity” status enjoyed by corporations (meaning the company is a separate entity from its owners), the profits and voting power are not necessarily allotted the same way.

An S-Corporation divides profits between its shareholders evenly. Someone with 30% of the stock would receive 30% of the profits while another with 10% of the stock would receive 10% of the profits, and so on.

This is not the case with the LLC. In an LLC, the members (akin to stockholders, although LLC’s usually issue “member units” as opposed to common stock) decide how profits should be divided. There may be someone with 10% of the “stock”, but they put in 30% of the work. This stockholder can receive more than what they have invested if the other members agree that they deserve it.

The same goes with voting power. S-Corporations follow a more traditional structure by which voting power is determined by stock ownership. An LLC can give more or less voting power to stockholders regardless of how much stock they may own.

Also, there are several other abilities an LLC has that do not apply to S-Corporations.

LLCs:

• No ownership restrictions – virtually anyone (individuals, Corporations, other LLC’s, and even foreign entities may be owners of an LLC).
• Can operate with a single member.
• Are not required to hold annual meetings.

An S-Corporation has separate ownership provisions. The S-Corporation is limited to 75 shareholders all of which are required to be US citizens. They are also required to hold shareholder and corporate meetings, which can affect record-keeping needs and continuity within a company.

LLCs sound pretty good, right?

Well (and you knew this was coming), there are some down-sides too.

For starters, S-Corporations get better deductions in regards to benefits (health insurance, etc.)

The status of the pass through income is a little different as well for the personal service principals (the principals that are employees.) It is considered “passive income” and not “earned income (like it is with an LLC.) Thus, Social Security and Medicare taxes (at this writing) are not levied.

In addition, LLC’s may have a limited shelf-life. Some states have a cap on how long they can stay in business (30 years, etc.)

In closing, you could say that S-Corporations allow for more shareholder uniformity and tax savings, while an LLC allows more free negotiations and possibilities for ownership and accountability. You can almost think of an LLC as a marriage between a classic small business (partnership / sole proprietorship) and a corporation.

C-Corporations are the oldest and probably most common type of large domestic company. Many product and services that people come across daily are provided by corporations.

And while Limited Liability Companies are a newer entity type than C-Corporations, they offer unique differences that the C-Corporation cannot provide (and vice versa), and in recent years have often become the entity type of choice for newer and smaller businesses.

One of the primary differences between the two is from the taxing standpoint. C-Corporations are subject to corporate income taxes that are completely separate from their owner(s). Because of this, C-corporations have a greater and more complex tax reporting responsibility than most companies.

This differs from an LLC, which passes profits through to the owner(s), who are then subject to only personal income tax (i.e. The LLC does not pay federal income taxes to the IRS, unlike a C-corporation). This helps avoid double taxation, which C-corporations may have to face if they pay dividends to their shareholders (the corporate income is taxed, and then, if the net income that is left after taxes is distributed to the shareholders, it is then taxed at the personal level at the prevailing dividend tax rate.

While this may seem like an advantage for an LLC, that is not always the case. Because of the Pass through” of profits, LLC owners must pay self employment taxes on profits in addition to their personal income taxes.

A second major difference between LLCs and C-Corporations is that of the ownership structure.

C-Corporations have sort of a hierarchal structure. Power is divided between stockholders, who then hire/appoint directors that make the overall decisions for the corporation, who in turn hire/appoint officers to run the day to day operations of the company. Stockholders with more shares are rewarded with more voting influence and profits.

While this is a standard for most C-corporations, it is not the case with an LLC.

LLCs are structured essentially like a partnership (or a sole proprietorship in the case of a single member/married couple LLC), but with the limited liability protection, similar to a corporation. Members (the generic term used for the owners of an LLC) run the company and make all decisions. The division of ownership, as well as the distribution of the profits (which may be the same or different from the distribution of ownership) as well as most other matters are decided by private agreement amongst the owners.

With an LLC, the owners make the rules in regards to profit distribution and power. A 5% shareholder could reap larger profits if the other owners deem it fair. Thus, and this is in general terms, LLCs are typically a better choice for smaller companies where only a few principals and workers are involved.

Also, an LLC doesn’t need multiple owners to exist; only one member is required in order to have an LLC by all states.

LLCs are also not required to hold corporate and shareholder meetings, which are a requirement for C and S Corporations.

They both have their distinct uses. In general terms, a C-Corporation may be a better choice for a larger entity with more shareholders, and it is also the best choice if there are plans to of equity ownership to a larger number of owners, whether in terms of private placement or taking the company public and having it listed on a stock exchange.

However, this also means a tiny C-corporation stockholder who contributes beyond his or her percentage of ownership will not be rewarded anything beyond what he or she would have normally received (unless the shareholder is compensated with salary or bonuses).

For any business, paperwork is inevitable.

And to almost any business owner, this means there are tens if not hundreds of different forms and paperwork you must fill out in order to be in “good standing” with the government, the IRS, and more.

One such form deals with the Employer Identification Number (EIN).

What is the EIN?

Also known as the “tax id number”, you can think of the EIN as a social security number for your business.

Look at it this way: people need a Social Security Number. Why? Because is probably the most definitive form of ID you have, and you can’t do anything without it. You need it to open a bank account, apply for credit cards, get a marriage license, etc.

The point is; you need that 9-digit number for virtually everything.

Here’s one quick example: it’s simply too hard for the IRS to keep track of the myriad of business names when it comes to payroll taxes and such (how many “Tony’s Pizza” do you think there are?)

Another example is buying goods in many cases / states, you will not have to pay sales tax if you are buying items for resale. The proof you need? You guessed it, your EIN.

When forming a new business, an Employer Identification Number must be applied for.

If you either:

• Have employees
• Operate as a Corporation or a Partnership

File one or more of the following tax returns:

• Employment
• Excise
• Alcohol, Tobacco, and Firearms

• Withhold taxes on income paid to a non-resident alien
• Have a Keogh plan

Or involved with any of the following types of organizations:

• Trusts and estates
• Real-estate mortgage investment
• Non-profits
• Farmers Cooperatives
• Plan administrators

then you will need an EIN.

To get an EIN, you will need to fill out the IRS form SS4.

There are also circumstances in which you will have to apply for a new number. Your EIN must be changed if:

• Your existing business is purchased by another individual, creating a sole-proprietorship.
• A sole proprietorship, partnership, corporation, or LLC changes from one to another.
• The owner of a company passes away, and the estate takes over the business.

Click here to have IncFile obtain and email you a FEIN / Tax ID Number.

When someone thinks of a “corporation”, they are typically thinking of the two big types of corporations: C-Corporations and S-Corporations. While they are similar in many respects, they do have several differences that are noteworthy.

While both types are separate legal entities from their owners (shareholders), only C-Corporations operate as a separately taxed entity from their owners.

This means that the shareholders, employees, owners of a C-corporation pay tax on their personal salary, while the corporate profits are taxed separately (and often at a lower rate). The downside to this is that when the after-tax profit is dispersed as dividends, it is taxed again (although tax laws do change from time to time).

S-corporations are not treated as separate taxable entities like C-Corporations. Because of this, net income is passed through the S-Corporation to the personal income tax of the owner(s).

What does this mean? It means a completely different taxing structure. C-Corporations must file and pay taxes with the IRS, separately from he income/salary/bonuses of the owners and employees. The first $50,000 of taxable corporate income is federally taxed at a rate of 15%, and the next $25,000 is taxed at 25%.

S-Corporations do not face the same taxing burden. Because the profits pass through to the shareholders, the business does not have to file taxes in the traditional way. They simply need to file a form 1120S, which is similar to the filing required for a C-corporation, but it is only an informative document; no corporate income taxes are paid to the IRS for the S-corporation. The owners pay personal income taxes as follows: Compensation (in the form of salaries, bonuses, etc.) is treated as ordinary personal income for federal taxation purposes and are subject to payroll taxes, whereas after compensation corporate net income is distributed to the shareholders in proportion to their share of company ownership and is treated as a non-qualified dividend (i.e. Such income is taxed at the personal income tax rate, but is not subject to payroll or self-employment taxes).

Both corporations are controlled by shareholders – each “share” is actually a tiny stake in the company (i.e.: a common share of stock.) These shareholders have a limited personal liability, meaning they cannot lose more than they invest. It also means that their company will always exist, unless they choose to close it (and assuming that any reporting and tax requirements are met and kept current, and the corporation otherwise stays compliant with the law).

While there are generally no citizenship or residency requirements to be a shareholder of a C-Corporation, this is not the case for an S-Corporation. United States citizens and resident aliens are generally free to own shares, non-resident aliens are barred from ownership in an S-Corporation.

While an S-Corporation can be perceived to have a better personal financial impact, they are subject to restraints that do not bind C-Corporations.

S-Corporations may not:

• Exceed 100 shareholders.
• Have shareholders who are non-resident aliens.
• Have more than one class of stock.

Have shareholders that are other corporate entities; S-Corporation shareholders must be natural persons.

C-Corporations are not subject to these restraints, giving them more room to grow and expand.

Both S and C-Corporations offer positives and negatives. While S-Corporations may have better circumstances with which to profit the principals (in most cases), C-Corporations have more flexibility, allowing them to expand beyond the scope of most S-Corporations.