C Corporations
C corporations are taxed as entities separate from their shareholders.  The corporation pays taxes and you pay taxes as an employee - the so called “double taxation.”  Investors are taxed on received dividends.  C corporations can generally offer more fringe benefits than S corporations and partnerships.  However, C corporations may receive more IRS scrutiny in several areas.  Salary paid to you and other shareholders must be reasonable, or a portion of it may be reclassified as a nondeductible dividend payment.  If earnings are accumulated beyond the corporation’s reasonable needs, an additional tax of 15% will be imposed on these earnings.

S Corporations
S corporations generally pay no tax, and income and losses are passed through to shareholders.  The American Jobs Creation Act of 2004 increased the number of permissible shareholders from 75 to 100.  Furthermore, eligible members of the same family may now be treated as a single shareholder.  Estates, certain trusts, and tax-exempt organizations may also be shareholders.  S corporations avoid the double taxation inherent with a C corporation but must follow strict rules.  S corporations that were previously C corporations can trigger corporate-level tax in certain situations.

S corporations may own any percentage of the stock of other corporations.  Fully owned subsidiaries may also elect “S” status, but the qualified subsidiary is a disregarded entity for tax purposes.

Partnerships
Partnerships are popular because they avoid corporate double taxation and usually allow more flexibility in distributions and allocations of tax items than either a C or S corporation.  In particular, family limited partnerships (FLPs) offer a number of benefits: you can split income with your children; realize estate tax savings; and continue to control assets transferred to the partnership.  However, family limited partnerships must be carefully structured since the IRS watches them closely.

LLCs & LLPs
Limited liability companies (LLCs) and limited liability partnerships (LLPs) generally offer limited liability and flow-through taxation.  They have a flexible structure, which allows any entity, including a corporation, to be an owner.  Also, special allocations of income and losses, as well as investments in other entities, are not limited.

Sole Proprietors
If you are a sole proprietor, your personal return is your business return.  If you risk substantial business liability, consider some form of incorporation, LLC, or LLP to protect your personal assets.

Which is right for you?  That’s a decision made between you and your financial and legal advisers.  And remember, you must consider state and local taxes when evaluating business structures.