Businesses can choose to file under a number of different structures that best benefit their needs and interests. All have different criteria that the business needs to meet, and some are significantly more complicated than others. We’ll focus on the 4 main types of business structures that NJ companies tend to file as–LLC, Partnership. C Corp, and S Corp.
Difference Between LLC and Partnership
For small businesses with 2 or more owners that either don’t meet the requirements for a corporation or don’t have the funds necessary to file as one, Limited Liability Company and Partnership are both attractive business structure options.
In an LLC, businesses enjoy some of the protections of a corporation in that members cannot be held personally liable for any debts owed by the business, while in a partnership, at least one partner can be held personally liable.
LLCs also feature more tax flexibility, and the management structure is laid out entirely in the operating agreement. Generally speaking, LLCs are the more popular choice for small businesses, but partnerships could be an attractive option if the owners just want to test their idea out or depending on their state’s laws regarding both structures.
Difference Between S Corp and C Corp
Registering your business as a corporation protects your personal liability from debts owed by the business, but what type of corporation is best for you?
Businesses registered as C Corps have their income double-taxed–once on the income it reports, and again when dividends are paid to the shareholders. This can be costly, but C corps enjoy the benefits of having no limitations on the shareholders or where business is conducted, and 100% of the charitable contributions made by C Corps can be deducted, provided it doesn’t exceed 10% of its income.
S Corps are more difficult to form than the default C Corp, involving more paperwork and having limitations on shareholders (such as the number being capped at 100 and required U.S. citizenship of all shareholders). If you meet the qualifications of an S Corp, you’ll enjoy the benefit of only being taxed once on the income reported.
Having an experienced CPA on your side to ensure your small business is set up for success is the first step you should take before filing with the IRS. Contact us today!