What is an S corporation?

One of the most important thing you need to decide when you create a corporation or an LLC is how you want it to be taxed, because there are a few cases in which you have a choice depending on the number of members and whether you have decided to create a corporation or an LLC.

If you have created an LLC and you are the sole owner you can decide to be taxed as either a sole proprietorship or a corporation. If your organization has two or more members, you can choose between a partnership and a corporation.

As a sole proprietorship or a partnership, the income will be reported on your own individual tax returns. As a corporation, you will need to decide between a C corporation and an S corporation. Similar to LLCs, an S corporation is considered to be a “pass-through” business entity and the incomes are reported on the owner’s tax returns without the business being taxed directly.

On the other hand, C corporations are taxed at corporate level. If you receive dividends as a shareholder, you will also be taxed on your income at individual level. Choosing how to be taxed is one of the most important decision you have to make when creating your business. Before making your decision you should consult an attorney to make sure you choose the best option for your business.

By default, the legal name of a sole proprietorship is the owner’s name. Still, you can carry business under what is called a “fictitious business name” or “doing business as” (DBA) for which you need to file an application in some states.

When you go into business as a sole owner and without setting up another business structure, you are automatically considered a sole proprietorship by the government. There are exceptions since some states and counties require business licenses or permits before considering that a business can legally operate. If you want to operate under a different name than your legal one, you will also need to file for a DBA (doing business as).

A separate business account will help you properly report your business income on your personal tax returns. Generally, you can open a bank account using your Social Security number. You will need some legal document proofing filed DBA only if you want to conduct your business under a fictitious name and not use your legal one.

You always have the option to restructure your business into a corporation or LLC, if you think about taking on investors or partners, you want to benefit from liability protection or different tax options than the ones you already have.