Subchapter S Corporations
A Subchapter S corporation is a "regular" corporation with special tax treatment. There is a limit to the number of shareholders, and a special form must be sent to the IRS to choose Subchapter S status. When you have done so, the corporation files an annual tax return, but does not itself pay tax. Instead, the profit and loss of the corporation are passed through to each shareholder, in the same percentages as the percentage of ownership.
Limited Liability Companies
A Limited Liability Company (LLC) is a newer type of pass-through entity. A single member LLC can be a disregarded entity for tax purposes. An LLC can have several members, however, and in that case the profit and loss of the LLC will be passed through to each member, very like a Subchapter S corporation.
With either a corporation or an LLC, if there is more than one person in ownership, it is necessary to plan what will happen in case there is a disagreement between the owners in the future. No one ever gets into a business thinking they will disagree with their "partners", but it often happens. Or there may not be a disagreement, but one "partner" is no longer there -- by death, disability; or one "partner" suddenly faces a divorce.
There are other alternative forms of organization, but the two above are the most commonly used by small business owners. It is necessary to file papers with the Secretary of State to form the corporation or LLC and to get an employer identification number.
I would be happy to help you set up a corporation or an LLC; usually we will consult with your accountant for his or her suggestions about the tax implications of having your business run through an LLC or corporation.
