It is important to understand the type of business you can set up in order to choose the most adequate depending on your company’s structure. Here are the differences between LLC, S and C corporations.
Limited Liability Companies (LLCs) are essentially pass-through taxation entities owned by a partnership or a sole proprietorship with limited liability compared to a corporation. Some of the advantages of setting up an LLC are the flexibility of tax reporting options as well as management structure. This type of company also incurs in less paperwork and record keeping required in comparison to corporations. In most states a sole person can set up an LLC. This category is adequate for small businesses that are not willing to do business internationally. Some of the disadvantages include not being recognized outside the United States, hence bringing scarce interest from foreign investors as well as minor preference for IPO (Initial Public Offering).
Though the LLC can choose to be taxed as an S Corporation or C Corporation (as long as it qualifies for such), setting up a corporation can be favorable in different ways.
S Corporations, like LLCs, are pass-through taxation entities, meaning the business itself isn’t taxed and income is reported on the owners’ personal tax report, whereas in C Corporations income is taxed at the corporate level. S Corporations can also involve more than 100 shareholders but they have to be either citizens or resident aliens for it to qualify as such. Although C Corporations can’t hold more than 100 shareholders, the members can be from other countries without being necessarily residents of the U.S.
Filing your taxes is what distinguishes each entity as well as other features we have mentioned. LLCs can be more adequate for local businesses than don’t seek international investment while corporations have a greater status that can appeal foreign investors interested in future IPOs.