To formalize your organization, first learn about and decide which business type is right for you:
C corporation. A corporation is a separate legal entity set up under state law that protects owner (shareholder) assets from creditor claims. Incorporating your business automatically makes you a regular, or “C” corporation. A C corporation (or C corp) is a separate taxpayer, with income and expenses taxed to the corporation and not owners. If corporate profits are then distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). Many small businesses do not opt for C corporations because of this tax feature.
S corporation. Once you’ve incorporated, you can elect S corporation status by filing a form with the IRS and with your state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax).
Limited liability company (LLC). Another business type that is formed under state law and gives you personal liability protection is the LLC. Tax-wise, an LLC is similar to an S corporation (or S corp), with business income and expenses reported on your personal tax return. If you are the only owner of an LLC, you are viewed as a “disregarded” entity. This means you report the LLC’s income and expenses on Schedule C of Form 1040─the same schedule used by sole proprietors.