A noncorporate business whose owners actively participate in the organization's management and are protected against personal liability for the organization's debts and obligations.
The limited liability company (LLC) is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, usually treated as a noncorporate business organization for tax purposes.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
To qualify for S corporation status, the corporation must meet the following requirements:
1. Be a domestic corporation
2. Have only allowable shareholders
3. May be individuals, certain trusts, and estates and
4. May not be partnerships, corporations, or non-resident alien shareholders
5. Have no more than 100 shareholders
6. Have only one class of stock
7. Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders.