It is possible to avoid the double taxation of a C Corporation by forming an S Corporation. Here, the corporation’s income is divided among all of the shareholders who report the earnings on their individual tax returns. This is a tax-efficient way to structure your business if you expect losses in the short term because the individual shareholders can report the losses on their tax returns rather than paying the double taxation of the C Corporation.
The downside is that to become an S Corporation, you must run the company according to a fiscal calendar year, have less than 35 individual stockholders who are all U.S. residents, and have only one class of stock, in addition to other guidelines.
Limited Liability Companies
For many new entrepreneurs, choosing a business structure comes down to liability protection, tax savings and convenience. LLCs require fewer formalities and less on-going paperwork than corporations while offering the same personal liability protection and tax flexibility. Just as with a corporation, your company name is protected, and you and the other members of your company are shielded from creditors and other company liabilities such as lawsuits. But with an LLC, you only have to keep minimal company records, and there is no limit to the number of members your LLC can maintain.
If you’re looking for more information than provided here, we discuss this subject in detail in StartupNation: Open for Business to ensure that you pick the perfect structure to fit your business.