There’s something very powerful about starting a new business. It’s a commitment to make something from nothing and the desire to create products and services your customers love.

If you want to run a successful business, you need to build it on a strong foundation. That means deciding on the right structure and legal entity for your new venture.

The right legal structure will decide a great deal about your business — how you’re taxed, how you’re treated by regulators, how customers view you, and all the compliance and legalities you need to meet — and it can be confusing for any entrepreneur.

At Incfile, we’re experts in online business formation, and we’ve put together a guide to help you understand everything about choosing the right business entity and forming your business.

Why should I bother with forming a business?

Legally forming a business is a vital first step in bringing your products and services to market. Formally setting up your business as an LLC, S Corporation, or C Corporation means it becomes a separate legal entity in the eyes of the law, the Internal Revenue Service, and others.

That’s important because it protects your personal assets, helps you better manage finances, enables you to grow, and can be advantageous for tax purposes. It also demonstrates to your customers that you take your business seriously, which can help to build trust and win business.

Not to mention, forming a business doesn’t have to be difficult — you can complete all the steps necessary to create an LLC in under an hour, and the business could be formally created and registered in fewer than two weeks.

What types of business entities can I create?

There are several different types of business entities, including:

We don’t generally recommend sole proprietorships or partnerships as they don’t give you all the protections you might want as a modern business.

In this guide, we’ll explore the most common types of business entities — LLCs, S Corporations, and C Corporations — explore the differences between them, and help you decide which one is right for your business needs.

LLC vs. Corporation: Which is best for me?

This is one of the questions we’re asked most often, and the answer is… it depends. Both LLCs and corporations have advantages and disadvantages, and we’ll cover those in detail below.

What do I need to know about LLCs?

Advantages of LLCs

Disadvantages of LLCs

LLCs do have some disadvantages:

How LLCs Are Taxed

LLCs are taxed as follows:

What Do I Need to Know About S Corporations?

Advantages of S Corporations

How S Corporations Are Taxed

S Corporations are taxed in the same way as LLCs, with one important exception. Profit from S Corporations flows through to its owner's personal tax returns in the same way as for an LLC, however:

It’s this exception that makes the S Corporation an attractive choice.

What Do I Need to Know About C Corporations?

Advantages of C Corporations

Disadvantages of C Corporations

How C Corporations Are Taxed

C Corporations are taxed very differently from LLCs or S Corporations. In addition to all the other taxes and expenses, they also have to pay corporate income tax. The corporate tax rates levied on C Corporation profits are as follows:

| Profit | Tax Rate | |---------------------------|----------| | Less than $50,000 | 15% | | $50,000 - $75,000 | 25% | | $75,001 - $100,000 | 34% | | $100,001 - $335,000 | 39% | | $335,001 - $10,000,000 | 34% | | $10,000,001 - $15,000,000 | 35% | | $15,000,001 - $18,333,333 | 38% | | More than $18,333,333 | 35% |

Corporate tax is paid in addition to all the other taxes business owners need to pay — self-employment, state, sales, and federal income tax. That means owners are often paying taxes twice on the same money, which some consider double taxation.

Why might I choose a corporation over an LLC?

A corporation might be a better choice for your business entity if one or more of the following are true:

What if I want the tax advantages of an S Corporation without all the compliance and other hurdles?

Good news. You can combine the simplicity and ease of running an LLC with the tax advantages of running an S Corporation. Just form an LLC and elect to be taxed as an S Corporation. This is a common request, and the IRS is happy to allow LLCs to be taxed as S Corporations, together with the advantages that provides.

Note: This could save you money on your taxes, but it doesn’t give you any of the other advantages of an S Corporation.

How do I form an LLC or Corporation?

Forming an LLC or corporation is simple given the wide array of online formation companies who do most of the paperwork for you. Filing online can be done in as little as one day.

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