Understanding Business Entities

C Corporation- a tax entity that is separate entity from the owner. The owner’s personal assets are not part of the Corporation. As a separate legal entity, legal liability is limited to the net assets of the corporation. There are officers charged with responsibilities to effectively manage  the corporation.  Corporate net income is taxed at tiered escalating rates. The officers would be paid via payroll of the company. Corporate taxes  are paid by  the corporation and do not impact the owner’s personal tax returns.
 

S Corporation- similar to the C Corporation with some important differences. The S corporation pays no income taxes because it is a ‘pass through’ tax entity. The net income of the business is included on the owners personal income tax return. There are no self employment taxes with this business  income. The owner (President etc.) needs to have a reasonable salary . 

Partnership: must have a least 2 people to form this entity. The general partner has unlimited liability.  Limited partners liability is limited to their investment in the partnership.  Partners do not receive W-2 income. Instead, the partners receive their income through  guaranteed payments, which are subject to self employment taxes. . The net income is divided among each partner according to the provisions  of the partnership agreement. 
 

Limited Liability Company (LLC)-  this entity is a ‘pass through’ entity similar to a partnership. Unlike the partnership which has to have a general partner that has unlimited liability, the liability for the owners of the LLC is limited to the net assets of the LLC.  There is much less paperwork to form this and no annual meetings are required, a difference between LLC and S Corporations.
 

Sole Proprietor/ Individual: The business entity is easy to start but the all legal liabilities from the business are assumed by the owner personally. The net income from the business is reported on schedule C and is subject to self employment taxes.