If you are planning to set up a business, you should consider incorporation because it's approach that can benefit the owners a lot. The owners can avail considerable tax benefits but still can keep their personal assets protected from business debts. Business owners can choose to set up a business as a sole proprietorship, partnership, LLC, or corporation. Each of these has their own ways of benefiting the owner of the business and also has several different possibilities for business formation under them.
Incorporation is a more expensive form of business formation than setting up a sole proprietorship or partnership and generally, corporations have more ongoing costs than either of those business formations. However, some businesses are best when they are set up as corporations for the tax benefits as well as their limited liability.
LLC stands for Limited Liability Company. There are no share holders in LLC, but only members. In LLC, only the limited liability of the corporation is offered excluding the expenses of the corporation. Profits and losses in the company can be filed under the owner's personal income tax. By doing so, the owner is benefited because the loss is shown as a reduction of personal income to reduce the tax burden.
Check out with the state laws before setting up an LLC. There are some states that tax the corporation similar to C-Corp and not as the way a LLC has to be taxed. This is because, LLC is a new type of business formation and there are no such confirmed laws for the set up and operations. This is also the reason why the laws vary from state to state. So, it is better that you collect all the necessary information before taking any step forward with registering for LLC.
A type of business that offers limited liability for business and also lets the owners to file the business income in their own personal income taxes is called as S-Corp. In S-Corp, the owner of the business can use the business loss on his or her own taxes and thus claim for deduction in taxes. In contrast, the C-Corp organizations do not allow such filing and taxes for the corporation is separately applied. The most important benefit of having a S-Corp is that the owners or the shareholders will not be held liable for any of the debts that the corporation incurs.
Owners and shareholders of a C-Corp will have limited liability and each of them will be taxed separately on the profits of the company. The only type of company that is taxed separately as a separate entity is the C-Corp. It is not possible for the owners of the company to file the profits or losses of the company on his personal income taxes, as in S-Corp. However, the C-Corp owner can draw a large amount of salary and lower the tax burden because the tax can be applied only for the profit. The C-Corp offers the owners big benefits, but the cost associated with running it is also equally high.