DIY Corporate Credit Series: Establishing Corporate Credit Under the Right Business Structure – Part 2
Read Part 1 of ‘DIY Corporate Credit Series: Establishing Corporate Credit Under the Right Business Structure’
2. Business Structure: S Corporations
An S Corporation is much like that of a C Corporation. The IRS considers it to be a separate entity from its owner(s). However, it comes with limited liability protection, as you’re not necessarily protected from various types of litigations. One example of this is tort actions taken against the company for workplace incidents.
Also, with an S Corp, the business itself is not taxed. Instead, some profits and loses will actually be filed through your personal federal tax return. Yet, as a shareholder, if you actually work for the S Corp, you’re allowed to pay yourself “reasonable compensation.” If all shareholders who put in work for the business aren’t compensated with fair market value, some corporate earnings may be reclassified as “wages” by the IRS.
3. Business Structure: Limited Liability Company
A limited liability company, also known by simply LLC, combines some of the features of both corporations and partnerships. With an LLC, each “owner” is referred to as a “member.” Some states allow a single member to own an LLC, while others require two or more individual members, other LLCs or corporations.
Unlike corporations, Limited Liability Companies are not taxed as separate entities. Instead, the profits and losses of the companies are “passed through” the LLC to each of its members. These profits and losses are reported on the personal federal tax returns of the LLC members, like that of a partnership.
4. Business Structure: Nonprofit Organization
Nonprofit organizations are also referred to as 501(c)(3) organizations. IRS grants this business structure tax-exempt status. In most cases, donations made to the nonprofit organization by both individuals and other businesses are tax deductible for the donors. Operating and financial disclosures are very important for 501(c)(3) organizations in order to ensure the public that contributions are being used properly.
Income tax is not paid on donations and fundraising money earned by nonprofit organizations. In order to qualify for this tax-exempt status, the organization must benefit a specific purpose and provide benefits for the general public. Some of the most popular types of non-profits include schools, hospitals and churches.
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