The most common structure but typically not the best choice for small startup businesses. Here are some key points for this type of structure; less risk for audits, the income of the business is filed separately and does not pass thru the owners, unlimited shareholders, easier to raise capital, self-employment tax savings and frequently higher salaries to owners that work within the company.
The key advantage of an S corp is that it is not double taxed, and the remaining profits from the company are distributed to the owners to their financial interest and taxed at a lower rate. Payments to owners can be characterized as dividends or as wages; however, heavily scrutinized by the IRS. There can only be one class of stock. Therefore the distribution of annual profit or loss must be controlled by shareholders’ ownership, and to maintain the accumulated adjustments and accountant is required for accuracy
Over the years this has been the most used structure and provides most of the same protection as a “C” corporation. With this type of entity, the managers of the company or identified as Managers or Members and an Operating Agreement is used in place of By-Laws, which define how the members will govern day to day activity and describes each members’ financial management. The business does not file taxes like a “C” corp. Instead, the profit/or losses are passed through to the owners, therefore eliminating the double tax imposed on a “C” corp. There are fewer formalities an LLC has to follow compared to a “C” structure, and the company inner structure is more flexible. As an LLC the owner(s) will not be responsible for any liability that exceeds their invested interest in the business.
Although this structure does not engage in a profitable activity they to provide limited liability protection to the directors and officers. These organizations are tax exempt usually from both state and federal taxes and have access to grants and donations from both the public and government departments.