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Lawrence blau & associates, llc

All corporations start as “C” corporations. “C” corporations are not taxed as pass-through entities.  Within the first three months of the formation of the corporation, the shareholders can make an election to be taxed as if the corporation was an S corp.  

  • An election can be made after the first three months, but the election would be effective for the following year.
  • S corps have certain requirements.  
  • The maximum number of shareholders are 100 and all of the shareholders must be U.S. citizens.  Family members are counted as one shareholder.  
  • An S corp is taxed as a pass-through entity.  All profits or losses are passed through to the shareholder’s tax returns and the shareholders pay personal income taxes on the net profits or receive the tax benefits of any losses.  
  • S corps avoid the double taxation problem.  
  • The net profit of an S corp is not subject to employment taxes.  One strategy that used to be employed, was people actively involved in their business would make an S corp election and avoid employment taxes or Social Security and Medicare Taxes.  The IRS has issued safe harbor rules for this situation. Specifically, shareholders who are actively involved in their business, should report a salary.  A small amount of the net profit can be reported by the S corp.

Business Formations:

Understanding Personal Liability & Various Tax Treatments

Comparison of Business Formations Chart

Similar to an LLC, a Corporation’s business is separated from the owner’s personal assets.  Owners are referred to as shareholders.

  • In contrast to an LLC, a Corporation is considered a separate legal entity and must submit a tax return and pay any income taxes on profits.  In some cases, this can lead to “double taxation”.  “Double taxation” occurs when the corporation is first taxed on its profits and taxes are again imposed when the shareholders take those profits out in the form of dividends (those dividends are taxed on shareholders' personal returns).
  • The first $50,000 of corporate profits are taxed at a lower rate than the personal income tax brackets.  One tax strategy used is to pay corporate taxes on the first $50,000 of profits and then have the shareholders take the rest of the profits as salary.  There is one problem with this strategy: corporations that are classified as "personal service corporations” pay tax at the same bracket as their owners.

Limited Liability Company or (LLC)

"S" Corporation

Lawrence Blau & Associates, LLC specializes in business formations
LAWRENCE BLAU & ASSOCIATES, LLC TAX SERVICES, ACCOUNTING AND FINANCIAL ADVISORY SERVICES WESTCHESTER NY

Sole Proprietorship or general Partnership

Corporation

By default, an LLC is considered a pass-through entity, similar to a sole proprietorship or partnership.  This means that the business does not pay income taxes on its profits, but the profits or losses are passed through to the owners.  

  • The owners are called members and the members' personal assets are protected from the business.  The members must pay taxes on their share of the profits, whether or not the money stays in the business or is distributed to them.  
  • An LLC can make an election to be taxed like a corporation or a Sub-Chapter S Corporation (or “S” corp).  
  • LLC members are not employees, but LLC members who are active in the business, need to pay self-employment taxes on their share of their profits.  Also, LLC members who are active members, are able to deduct their share of the business’s losses on their personal returns and use the losses to offset other income.  
  • Favorable retirement plans are available.

A sole proprietorship or general partnership is selected by default if you do not select another business structure.  A general partnership has multiple owners and a sole proprietorship has a solo owner.  

  • Both these entitles offer one major drawback.  There is no separation between the business and business owner.  If your partnership or sole proprietorship is sued or cannot pay its bills, your personal assets may be subject to collection for the debts of the business.  
  • These are the simplest entities to form and offer the least amount of tax and financial problems.  You can set up favorable retirement plans and pre-tax benefits under both types of entities.