Entity types
C corps, LLCs, S corps, partnerships and sole proprietors: how each is taxed, what each files, and when to convert.
9 lessons17 nested pages130 min2 exercisesFree
C corp, LLC or S corp: which entity should my startup be, and what does each one owe? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 9 lessons
- The entity menuWhat are the different types of business entities in the US?
- How each entity is taxedHow are LLCs, S corps and C corps taxed differently?
- The S corporation electionShould my business elect S corporation status, and who is eligible?
- Why startups are Delaware C corporationsWhy do startups incorporate as Delaware C corporations?
- Converting an LLC to a C corporationHow do I convert an LLC to a C corp, and what are the tax consequences?
- Where to incorporateWhere should I incorporate my startup — Delaware, Wyoming, Nevada or my home state?
- US companies for founders abroadHow do non-US founders set up a US company?
- Parents, subsidiaries and groupsHow do parent and subsidiary company structures work for tax?
- Choosing an entity in practiceShould my startup be an LLC, S corp or C corp?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Sole proprietorshipA business one individual owns without forming an entity. Its profit is reported on the owner's Schedule C with self-employment tax on Schedule SE, and the owner is personally liable for its debts
- General partnershipTwo or more people carrying on a business together for profit without forming another entity. Each partner is personally liable for the partnership's debts; it files Form 1065 and pays no income tax itself
- Limited liability companyA state-law entity whose owners (members) are shielded from its debts like shareholders. Federal tax has no LLC category: by default it is a partnership with two or more members and disregarded with one, and it is a C or S corporation only if it elects
- C corporationA corporation taxed as a taxpayer in its own right: it files Form 1120 and pays 21% of its taxable income, and its shareholders are taxed again on what it pays them as dividends. Every corporation is a C corporation unless it elects S status
- S corporationA domestic corporation, or an LLC eligible to be treated as one, that has elected on Form 2553 to pass its income, losses, deductions and credits through to its shareholders. No more than 100 shareholders, all of them individuals other than nonresident aliens, estates, or certain trusts and exempt organizations, and one class of stock. Files Form 1120-S
- Disregarded entityAn eligible entity with one owner that has not elected to be a corporation, ignored for income tax so its results go on the owner's return — Schedule C for an individual owner. It is still a separate legal entity, and still the employer for employment taxes
- Check-the-box electionThe election on Form 8832 by which an eligible entity — an LLC or a partnership, never a corporation formed under a state's corporation statute — chooses its federal tax classification. Effective no more than 75 days before or 12 months after it is filed, and after a change, no second change for 60 months
- Public benefit corporationA for-profit Delaware corporation formed to produce a public benefit named in its charter, whose board must balance the stockholders' financial interests, the interests of those its conduct materially affects, and that benefit. Reports to stockholders on it at least every two years; taxed like any other corporation
- 501(c)(3) organizationA nonprofit organized and operated exclusively for the exempt purposes section 501(c)(3) names — charitable, educational, religious, literary, scientific and the like — none of whose earnings may benefit a private shareholder or individual. It has no owners and no equity to sell
- Self-employment taxSocial Security and Medicare on net earnings from self-employment — 92.35% of net profit, taxed at 12.4% up to the year's wage base and 2.9% on all of it — owed once net earnings reach $400, with half deducted from income. Sole proprietors and general partners pay it on Schedule SE
- Pass-through entityAn entity whose income is taxed to its owners instead of itself — a partnership, an S corporation, a disregarded entity. Each owner is taxed on their share of the income, which need not match the cash the entity pays out
- Schedule K-1The statement a partnership (with Form 1065) or an S corporation (with Form 1120-S) gives each owner, reporting that owner's share of income, deductions and credits for their own return
- Double taxationA C corporation's profit taxed to the corporation when earned and again to its shareholders when paid out as dividends. The corporation gets no deduction for the dividend, and shareholders cannot deduct its losses
- DividendA distribution of earnings to shareholders, declared by the board — a liability from the declaration date and a reduction of retained earnings, never an expense
- Form 1120The federal income tax return of a domestic C corporation, filed every year whether or not it has taxable income — due the 15th day of the 4th month after year end, April 15 for a calendar year, with tax at 21% of taxable income under IRC §11(b)
- Form 2553The S corporation election, signed by every shareholder and filed no more than 2 months and 15 days after the start of the tax year it is to take effect, or at any time in the year before. An eligible LLC files it without Form 8832; a late election can be rescued under Rev. Proc. 2013-30
- Reasonable compensationThe wages an S corporation must pay a shareholder who works in the business, for that work, before it makes non-wage distributions to them. A C corporation's founder on payroll is an employee too, but the rule is the S corporation's
- Limited partnershipA partnership with at least one general partner who carries unlimited liability and limited partners whose liability is limited. A limited partner's share of income is kept out of self-employment earnings, apart from guaranteed payments for services
- Limited liability partnershipA partnership that gives limited liability to every partner, not only the limited ones. Formed under state law, which sets who may use it
- FICASocial Security tax — 6.2% of wages up to the year's wage base — and Medicare tax — 1.45% of all wages — each paid twice: withheld from the employee and matched by the employer. 7.65% a side below the wage base
- Social Security wage baseThe maximum annual wages subject to the 6.2% Social Security tax, for employee and employer each — $184,500 in 2026, $176,100 in 2025, indexed every year. Medicare tax has no cap
- Qualified business income deductionA deduction for taxpayers other than corporations of up to 20% of qualified business income from pass-through businesses, limited above an income threshold. Made permanent by Pub. L. 119-21, which also added a $400 minimum for $1,000 or more of income from businesses the owner materially participates in
- ApportionmentDividing a multistate business's taxable income among states by formula — historically property, payroll and sales; now in most states the sales factor aloneConvention
- Delaware franchise taxThe annual tax every Delaware corporation owes for the privilege of being incorporated there, whether or not it does business or makes money there — the lower of the authorized shares method and the assumed par value capital method, minimum $175 or $400, maximum $200,000, due with a $50 annual report by March 1 and prorated in the first year
- Liquidation preferenceA preferred stockholder's right to be paid a stated amount — usually 1× the original issue price plus declared but unpaid dividends — before common stockholders in a sale or liquidation. Non-participating preferred takes the greater of that or its as-converted share; participating preferred takes both
- Payroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxesConvention
- Qualified small business stockOriginal-issue stock of a domestic C corporation with gross assets of $75 million or less at issuance that lets holders exclude gain on sale — for stock issued after July 4, 2025, 50% after three years, 75% after four and 100% after five, up to the greater of $15 million or ten times basis per issuer. Stock issued earlier keeps the old rules: $50 million of gross assets, five years, $10 million
- Registered agentThe person or company, with an address in the state, that a corporation must keep to receive legal process and the state's notices. Delaware sends its annual report and franchise tax notices to the registered agent each December
- Statutory conversionChanging an entity's legal form under a state conversion statute — an LLC becoming a Delaware corporation under 8 Del. C. §265 — so the converted corporation is the same entity and nothing is wound up. For tax, a partnership's conversion is treated as a transfer of its assets to the corporation for stock, followed by a distribution of the stock to the partners
- Section 351 exchangeA transfer of property to a corporation solely for its stock, with no gain or loss recognized when the transferors control it immediately after — at least 80% of the combined vote and 80% of every other class of stock
- APICWhat shareholders paid for stock above its par value, plus the credit side of stock-based compensation — part of contributed capital within equity
- 83(b) electionAn election, filed with the IRS within 30 days of receiving restricted stock, to be taxed on its value at grant rather than as it vests — at a founder's purchase price, usually no tax at all, and the capital gain holding period starts at once
- Foreign qualificationRegistering a corporation formed in one state to do business in another — a Delaware corporation with its office or staff in California files there, appoints an agent there and files that state's annual report. "Foreign" means another state, not another country
- Good standingA state's confirmation that a corporation exists and is current on its annual reports and franchise taxes. In Delaware a year of unpaid franchise tax makes the charter void; banks, investors and other states ask for the certificate
- State annual reportThe yearly filing a corporation makes with its state of formation and each state where it is qualified — officers, directors, address, and in Delaware the figures the franchise tax is computed from. Names, fees and due dates vary by state
- Form 5472The IRS information return a US corporation that is 25% or more foreign-owned at any time in the year — or a US disregarded entity wholly owned by a foreign person — attaches to its income tax return to report transactions with related foreign parties. $25,000 penalty for each failure to file, and $25,000 more for each 30 days it continues past 90 days after IRS notice
- ITINThe 9-digit number the IRS issues to a person who needs a US taxpayer identification number but is not eligible for a Social Security number, applied for on Form W-7
- SubsidiaryA company that another company, the parent, owns or controls. It is a separate legal entity with its own books; a wholly owned LLC subsidiary that has not elected corporate status is disregarded for income tax but not for state law or payroll
- Consolidated returnOne federal income tax return filed by an affiliated group of corporations: a common parent and the corporations it owns at least 80% of, by vote and by value
- IntercompanyA balance or transaction between two entities in the same group — real in each entity's books, eliminated on consolidation
- EliminationA consolidation-only entry removing intercompany balances, transactions and unrealized profit, so the group does not report trading with itself
- ConsolidatedPresenting a parent and the entities it controls as one economic entity, with intercompany balances and transactions eliminated
- ComminglingRunning company and personal money through the same account or card, so the books can no longer show whose a transaction was. The fix is a separate business account and a recorded entry — a reimbursement, a loan from the founder or a contribution — for every crossing