In the United States, the form of business C-Corporation/S-Corporation or LLC, Partnership, Sole Proprietorship depending on its purpose and durability.
For a corporation, it is divided again into C-Corporation and S-Corporation and the difference of these two would be on the decision of double taxation. In another word, C-Corporation must pay a corporate tax on the company’s profit. If the company distribute and pay a dividend to the shareholders, the shareholders must pay income tax if they are individuals and corporate tax if they are corporations.For S-Corporation, the corporation will not pay any taxes even though it has earned a profit. However, the shareholders will receive profit/loss ratio of their shares and file a tax return to prevent double taxation.
S-Corporation may have a greater advantage in terms of taxation, but C-Corporation or LLC may be a better choice for domestic companies and business operator because requirements for S-Corporation is complicated.
Corporation Requirements for S-Corporation
- Shareholder must be an individual
- Number of shareholders must be less than 100
- Shareholder must be U.S. citizen or permanent resident
- Only one kind of stock can be issued
In the United States, it is not necessary to incorporate a local corporation where the main sales activity is performed because the corporation can not only do business in the state that has been incorporated but also in other states. The corporation can be established in the state of the favorable condition according to its purpose of incorporation and business method of the company. However, a Certificate of Authority must be submitted to the State concerned in order to conduct a business in other states.
|Types of Corporation||C-Corporation||S-Corporation||LLC|
|Tax Return||Form 2553||Form 2553|
|Who||Company pay taxes that has been imposed on profit of the company||''0' Corporate tax
Shareholders file individual tax returns
|Shareholders file individual tax returns on all of company’s profit|
|Restrictions on Shareholders||No restriction||Up to 100 shareholders
(Only for U.S. citizen and permanent resident)
|Stock Trading||Can trade stock without restriction||Can trade stock without restriction||Requires approval from other shareholders|
|Other||Need Annual Meeting,
Must keep related documents
|Need Annual Meeting,
Must keep related documents
|No need for Annual Meeting|
LLC may not disclose its corporation through the stock market to raise funds and the interests may become complicated if the corporation is large and has a large number of investors. Also, if the company is not specified in the Operating Agreement and the owner of the corporation dies or retires, it will be difficult for the corporation to survive.
Taxes on LLC profits are not paid by the company, but are reflected in individual income tax returns. C-Corporation, on the other hand, is subject to corporate income tax as income before giving dividends to shareholders. Shareholder dividends are reflected in the personal income tax return. At this time, the dividend cannot be Business Expense Deduction.
LLC will pay taxes on the entire revenue. If there is one member, it will be reported through Schedule C, and if more than two members will be reported using Schedule K1 like Partnership. At this time, a 15.3% self-employment tax is required for income.
On the other hand, S-Corporation will take profits in the form of salaries and dividends. You should pay 15.3% of your self-employment tax for the amount you receive on the payroll basis, but you will not pay social security tax if you take it as a dividend. Therefore, S-Corporation is advantageous in terms of tax.
All legal entities will begin with C-Corporation, and Form 2553 can be completed and changed to S-Corporation. C-Corporation is subject to corporate tax on income, and if income is distributed to shareholders again, the tax will be paid twice because the shareholder is subject to income tax.
On the other hand, S-Corporation is advantageous in terms of taxation because income from S-Corporation is divided by shareholder's income. However, S-Corporation is limited to 100 shareholders, and companies and foreigners cannot enter shareholders.