In North Carolina and all other states, there is substantial paperwork involved in running a business as a corporation or as one of the related limited liability business structures. Notably, the straight business corporation will have much more paperwork and tax burdens than the other popular structures. In many states, the alternative setups include a Subchapter S corporation or an LLC. All three structures provide limited liability, but when establishing a corporation, several other factors should be considered prior to deciding.
An S corporation is a simpler version of a full-fledged business corporation. In effect, the corporation is not taxed on the profits, but those amounts are taxed to the individual on his or her personal returns. With a straight business corporation, the business is taxed on the net earnings, and then the remaining profits are taxed to the individual owners who receive them. This is said to be a form of double taxation on the same funds.
Double taxation motivates most smaller entities to choose either the Subchapter S or an LLC model. Both of those allow the individual to pay only once, on the individual’s personal return only. The choices, however, are complicated enough under federal and state laws that it is highly prudent for a small business owner or owners to first consult with a business attorney, an accountant and others who may provide special expertise.
For most small entities, the Subchapter S option may be considered most convenient. The S corporation is a good selection where the company sees continued growth, with future financing needs. As the level of sophistication and complexity of capital formation goes up, so does the complexity of the legal structure that is best suited for the company.
Either of the three structures will give you limited liability protection for your personal assets under federal and North Carolina law. Additionally, remember that with any form of limited liability organization there will likely be quarterly returns for estimated income tax payments and various reporting requirements. Except in small, shoestring operations, the business owners should have an accountant and other professionals onboard when establishing a corporation.
Source: AARP, “Smart Ways to Start a Small Business“, Erik J. Martin, Nov. 20, 2014