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|Types and Differences of American Companies
First of all, I would like to talk about the categories of American companies.
There are two categories:
limited liability company and limited liability company.
Limited liability companies include:
- Sole Proprietorship (sole proprietorship):
generally do independent contractor, consultant or freelancer, you can choose this.
You can start business without submitting any forms.
Tax filing is to report to Form 1040 Schedule C for individual tax filing.
This corporate form of setup is the simplest and easiest to revoke.
(If it's a single-member LL C, it's also a sole proprietor tax return, which is the same as filling in Schedule C.
) - General Partnership Limited liability companies mainly include:
This type of company is very simple and straightforwarD.For small businesses, this is a more appropriate form.
It is also very suitable for foreigners to register LLC.LLC has no restrictions on ownership, and foreigners can also be owners.
LLC can be member managed, or managermanageD.In this way, owner can manage LLC directly as member, without boards of directors and other troublesome things.
In addition, LLC does not need to hire people.
One person can do it.
In terms of taxation, LLC defaults to pay taxes directly with individuals as pass through entity, that is to say, corporate income is regarded as personal income.
Fill in Form 1040 Schedule C.You can also choose to declare tax as S Corp or C Corp.
- C Corporation:
If you want to set up a corporation, by default is C corp, unless you choose S Corp from IRS file Form 2553. It should be noted that S Corp or C Corp is only a distinction in federal tax.
In state taxes, not every state recognizes Scorp.
If it is a small-scale new company, the cost of opening LLC is small, and the operating cost is relatively low.
But if the company's income or net profit is high, C-Corp may be a better choice.
Because the earnings earned by C Corp.
can be put in the company and taxed according to the company, the tax rate is relatively low.
If you pay with your personal income tax, you may have a higher tax.
- S Corporation:
No more than 100 shareholders.
S Corp is limited to U.S. citizens or resident aliens who can register.
There are some ambiguities in this understanding.
For example, the green card is a permanent resident, but if H1B has been in the United States for many years, it is also a permanent resident in terms of tax returns.
Differences between LLC and S Corp LLC is simple to operate, but S-Corp is troublesome.
It needs regular shareholder meetings and minutes.
The profits and losses of LLC and S-Corp are passed-through to shareholders and are reported together with the individual income tax of each shareholder.
But LLC's income is entirely payroll tax.
This includes SSN + Medicare tax, which has a 15.3% tax rate.
S-Corp has an advantage over LLC in tax revenue if the company is profitable.
Only S-Corp payroll taxes its employees.
But the other part of the salary is counted as distribution, which is not payroll tax, but tax with personal income tax, so the tax rate can be very low.
In that case, many people would say that if I took the money out of S-Corp, I would try to count it as a dividend instead of paying payroll tax.
But this idea is really naive, because IRS has rules for it.
That is to say, S-Corp must pay its employees a reasonable salary.
So, if you take money out of S-Corp to yourself, be careful not to easily treat the money that should be paid as a dividend, otherwise it will cause IRS trouble.
S-Corp may be more appropriate if your company is profitable.
Because your salary is basically fixed according to industry standards, you don't have to pay rolltax if you give yourself a large profit.
This is much better than LLC's full payroll tax.
The difference between C Corp and S Corp.
C-Corp is an independent legal entity when it pays taxes.
It needs to fill in Form 1120.
According to the enterprise's tax return, the initial tax rate is relatively low.
For example, the net profit of less than 30,000 US dollars is tax rate of 10-15%.
In addition, because S-Corp and LLC make money through-through to declare tax in the name of individuals, while C-Corp earns money can stay in the company, so if you want the earnings to be invested in the company and make the company bigger, C-Corp has a better form of company.
This form is also the preferred form of VC venture capital.
The disadvantage of C-Corp is the double taxation of company and shareholders.
Because the money earned should be taxed once according to the company; if it is taken out of the company, it should also be taxed in the personal income tax.
So in terms of tax revenue, C-Corp needs good planning and reasonable tax avoidance.
S-Corp's revenue or loss needs to be reported with personal income tax, so S-Corp is called pass-through tax entity in English.
Because enterprises do not pay taxes themselves, but they need to fill in the Form 1120S tax form.
In terms of corporate ownership, C-Corp has no limit on the number of company owners; however, S-Corp is limited to no more than 100 shareholders, and the shareholders of S-Corp must be U.S. citizens or permanent residents.
If an enterprise has operations in many states, then C Corp may be more appropriate, because taxation in many states is extremely complex for S Corp.
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