Businesses that operate without any incorporation leave owners liable for financial and legal obligations of the business. These companies will not file their own tax return, but rather report business activity on their personal return. Owners will pay income tax and self employment taxes on business income.
A corporation is a separate legal entity from its owners. This means that shareholders have no personal liability for the company’s financial obligations.
A C-corporation is taxed on its income directly at a corporate tax rate. Shareholders pay taxes only on dividends or income they receive from the business.
An S-corporation is a C-corporation that has chosen an S-election from the IRS. While still a separate legal entity, the business will not pay income taxes. Instead shareholders are taxed on their share of income that the business generates at their personal tax rate.
An LLC is similar to a corporation or a partnership. The LLC protects the owners or members from personal liability, but for tax purposes it is treated as a non business entity for tax purposes as the IRS does not recognize the LLC as a corporate entity. All income is processed on the owner's personal return. Owners will pay federal income tax and self employment taxes on business income. The business will not file a return unless an S-corp election has been approved, at which time the IRS will treat as an S-Corporation.