Tax Considerations in Choosing the Form of Organization for a New Business

Founders of a new business typically realize early on that they need to conduct the business through a legal entity to limit their personal liabilities for the debts and obligations the business generates.  Often, the three entity types from which the founders must choose are the “C” corporation, the “S” corporation and the limited liability company (or “LLC”).  While all three entity types insulate the founders from personal liability, the differences among the three types for tax purposes may be substantial.  A C corporation, on the one hand, reports and pays tax on its income separately from its owners.  The income or loss of an S corporation or LLC, on the other hand, generally is reported by the owners on their personal returns.1  The choice, therefore, is often tax-driven and requires an analysis of how the founders expect to grow and profit from the business.2

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