One of the most common questions we receive is “How will my company be taxed?” This answer is based entirely on the type of entity you choose. The three major types of entities are corporations, s-corporations, or Limited Liability Companies.
Corporations are subject to double taxation. The corporation is considered an entity separate from its stockholders and is taxed on its profits. When these profits are distributed to the shareholders as dividends, they are taxed again on the personal level. Although these entities are doubled taxed, there are many benefits that are available to corporations that are not available to S- Corps or LLCs.
S Corporations and LLCs are taxed as if they were partnerships - no tax is due on the entity level. Each partnership engaged in a trade or business must file a return using Form 1065 showing its income, deductions, and other required information. The return shows the names and addresses of each partner and each partner's distributive share of taxable income and deductions. If an LLC is treated as a partnership, it must file Form 1065 and one of its members must sign the return. The partnership does not pay any tax on its income but "passes through" its profits or losses to its partners. Partners must include partnership items such as their distributive share of income and deductions on their personal tax returns. Unless the LLC elects to be taxed as a corporation, it will be taxed as a partnership - income and deductions of the LLC will be passed through to members for inclusion in their personal returns. See "pass-through" taxation for more information.