Typically for new businesses, the first legal decision to be made is what business entity you should form. The three most common types are the C-corp, S-corp and LLC.
The LLC is technically not a corporation, but a Limited Liability Company. The LLC is structured with flow-through taxation to its owners. Here, you decide who the members or owners are and what percentage of the company each member owns. profits can be unequally distributed among its members along percentages based upon their responsibilities in the business. The LLC is not taxed as an entity, but instead the individual members are taxed based on their ownership percentages.
If an LLC doesn’t sound like it fits your needs, then you may decide to become a corporation and choose to file a tax election as an S-corp (which you can also do as an LLC) or a C-corp.
With an S-Corp, you elect to pass corporate income, losses, deductions, and credits through stockholders. Stockholders report flow-through of income and losses on their personal tax returns, like owners would in an LLC. But unlike the LLC, S-corporations have restrictions with respect to their ownership structure. Taxes are assessed at individual income tax rates, and owners only pay payroll taxes on the salary portion of their earnings (distributions are free of this taxation). S-corps also have certain qualifications you must meet. For one, you must be a domestic business with no more than 100 stockholders. Only allowable stockholders are allowed, for instance, individuals, certain trusts and estates. Partnerships, corporations and non-residents cannot be stockholders in S-corporations. S-corporations can have only one class of stock. Furthermore, certain types of businesses do not qualify such as certain financial institutions, insurance companies and domestic international sales corporations. S-corps must submit IRS form 2553 Election by small business corporation and must be signed by all stockholders.
In contrast, a C-corp is taxed separately from its owners. For a C-corp there are no limitations on who can be a stockholder or investor and are allowed different classes of stocks, typically preferred or common stocks. Different form the S-corp, the C-corp is taxed as its own entity, meaning it will pay its own taxes and file its own tax return, while all of the shareholders do the same.
Very popular today is the LLC. It is simple and cheap, usually only a few hundred dollars to set up. Also, it can be easily converted to a different entity at a later time. The LLC meets needs of man early stage entrepreneurs.
See this article for more information on entity type.