- LLC Corporation - Subchapter C & S Corporation - southernfried
When forming a new business, it’s important to limit personal liability. An important aspect to forming a corporation is that it puts limits on personal liability of the business owner(s). If a sole proprietorship or general partnership is unable to pay their accumulated debt, they could risk losing personal assets. If the company is a legal corporate entity, the liability is generally limited to company assets.
The one thing that most corporate structures have in common is the limitations on personal liability. Although there are other differences, the biggest difference between corporate structures is how income tax liability in configured. The remainder of this article will examine the income tax liability structure between the most common types of corporations.
Different Types of U.S. Corporations Business Structures
There two basic categories of corporations, federal and state. The majority of small businesses are state incorporated entities. Naturally the rules can vary by state, but for the purposes of federal income tax liability, the rules are generally the same for each type of corporation. The most common types of corporations include:
- Subchapter C Corporation
- Subchapter S Corporation
- Limited Liability Company (LLC)
C Corporation Federal Income Tax Liability
The Subchapter C Corporation is the traditional type of corporation. Large businesses are typically this type of business entity. U.S. Federal taxes are generally paid as a percentage of net income. There are certain laws that govern what types of expenses can be deducted from income, such as accumulated depreciation of assets, to determine the tax liability of a Subchapter C Corporation.
Corporate income tax rates can also change from year to year. The rate (percentage) can also change depending on the taxable income amount. The corporate income rate for 2010 is listed below for taxable income.
- $0 to $50,000 - 15%
- $50,000 to $75,000 - 25% (+ $7,500)
- $75,000 to $100,000 - 34% (+ $13,750)
- $100,000 to $335,000 - 39% (+ $22,250)
- $335,000 to $10,000,000 - 34% (+ $113,900)
- $10,000,000 to $15,000,000 - 35% (+ $3,400,000)
- $15,000,000 to $18,333,333 - 38% (+ $5,150,000)
- $18,333,000 and higher - 35%
S Corporation Federal Income Tax Liability
A Subchapter S Corporation allows taxable income to be passed to the individual shareholders. Instead of the corporation paying income taxes on profit at a higher corporate percentage, the tax liability is passed to shareholders at a lower personal income tax rate. In order to file for S Corporation status, the company must have fewer than 100 shareholders and the shareholders must agree by an election to take on an S Corp. status.
Limited Liability Company (LLC) Federal Income Tax Liability
Under an LLC filing, the tax liability of the company is treated more like a sole proprietorship or general partnership, while still providing personal asset liability protection. The net income of the company is transferred as personal income to the business owner(s) or members. The members then file the business profits as individual personal income for tax purposes.
Different tax rules may also apply by state. Before electing a particular business entity classification, the advantages and disadvantages should be carefully weight. State laws should also be a consideration. It’s advisable to seek the advise of a tax attorney or accountant before a decision is made.
Source:
irs.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
