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If you’ve ever set up a small business, you know that there are many decisions that need to be made. One decision is choosing the entity type for your business. This choice will impact your business in many ways. While there are other entity types such as a Not for Profit, Limited Partnership and Limited Liability Partnership, the most common are Corporations and Limited Liability Companies.


Corporations are owned by shareholders, ruled by a board of directors who elect officers to do day-to-day management. They can be created as either “C”, which is a typical corporation or an “S” which implies tax status. The income from a C corporation is taxed twice. The corporation pays tax on its net income. Then, shareholders also pay tax on distributions. Income from an S corporation is taxed just once at the shareholder level.1  Whichever you choose, corporate filings typically require more information than an LLC.

Not every corporation will quality to be an S corporation. To qualify, businesses must meet the following requirements:

  • Be a domestic corporation;
  • Have only allowable shareholders including individuals, certain trusts and estates and may not include partnerships, corporations or non-resident alien shareholders;
  • Have no more than 100 shareholders;
  • Have only one class of stock;
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies and domestic international sales corporations). 2


A Limited Liability Company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. 3

Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.  A few types of businesses generally cannot be LLCs. These include banks and insurance companies. 4

There is much information about business formation on the IRS web site at as well the Small Business Administration’s site at  If you have questions about filing to start a business, please contact me or our Corporate and Document Services Department.

“C or S Corporation Choice is Critical for Small Business,” by Robert Wood,

 Internal Revenue Service,

3  Small Business Administration,

4  Internal Revenue Service,


The information provided is for informative purposes only and is not intended to be legal advice or a legal opinion.  For legal advice, please consult an attorney.

April Brady

Manager, Corporate Services Department



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