What Are the Different Types of Business Structures?

The three main kinds of business entities are an S Corporation, a C Corporation – the letter S and the letter C have to do with the parts of the tax law they relate to. Limited liability company is a hybrid between a corporation and a partnership. It is actually the most popular entity because it offers flexibility that you don’t have in an S Corporation and a C Corporation.

An S Corporation is a corporation in which doesn’t pay tax on its own. The net profit or loss flows through from the corporation onto the shareholder’s tax return. The reason this is advantageous is that individuals have lower tax rates than the corporations. It makes sense if you’re going to do a corporation that you want to be an S corporation.

C Corporations pay tax on their own. They have a separate tax return. They will pay tax, and then the owners will pay tax on their salaries dividends if there are any. There are fringe benefits.

The limited liability company is a partnership, although it doesn’t have to be a partnership. It can be what’s called a single member limited liability company, which basically provides a certain amount of what I’ll call asset protection. What that does is if you happen to get into a legal problem, there’s some greater insulation between the assets and you, and the person who may be suing you. I think that’s one of the reasons why a limited liability company is so popular. It is, I think, far and away more popular than S Corporation or the C Corporation.