LLCs, LLPs and Corporations, Part II

Instead, the corporation would file its own tax return and pay tax on profits at special corporate tax rates. The drawback of a C corporation is the potential for double taxation, which Legal Lad touched on in last week's episode. In all likelihood, your bakery wouldn't need to issue stock or go public, so a C corporation would not be a good fit.

An S corporation or an LLC would both be reasonable choices. Both provide limited liability, and your share of business income, losses, and deductions will pass through to you. You report net income on your personal federal tax return and it's taxed at your individual income tax rate. This is the reason S corporations and LLCs are known as "pass-through" entities.

An S corporation has more administrative overhead than an LLC, but it has the potential to save you money on self-employment tax.

In the case of your bakery, let's assume that you would save only a very small amount on self-employment tax by forming an S corp. For this reason, you decide the savings isn't worth the extra paperwork and hassle of an S corp, and therefore go with the simpler LLC.

Legal Lad

Thanks, Money Girl. Because there are many factors to consider when choosing the best entity type for your business, it's a smart idea to consult both an attorney and a tax advisor, and if you can consult with them both together, so much the better.