A corporation is a legal entity that is separate and distinct. It is its own “person”; it can open a bank account, own property and conduct business under its own name. The main advantage of a corporation is that its owners (known as stockholders or shareholders) are not personally liable for the debts/liabilities of the corporation. Let’s say your corporation gets sued and it has to file bankruptcy, then the owners are not required to pay the debt with their own personal money. If the corporation’s assets are not enough to cover the debts, the creditors can’t go after the stockholders, directors or officers of the corporation to recover the unpaid debts. Your corporation will be either a C corporation or elect to be an S corporation (by filing Form 2553 with the Internal Revenue Service; each shareholder must also sign this form). A C corporation is taxed at two levels. You may have heard this called double taxation. The C corporation will pay its first tax on its corporate income and when the C corporation distributes profits to its stockholders, they pay income tax on those dividends, thus the second tax.

The S corporation is a pass-through entity that is taxed like a partnership or sole proprietorship. This way there is only one level of taxation. The S corporation’s profits “pass through” to the owners who then pay taxes on the profits at their individual tax rates. However, to be an S Corporation, there are some restrictions:

There can only be one class of stock. Preferred stock is prohibited.
No more than 100 shareholders and each must consent. Married couples are treated as one shareholder.
Shareholders must be a U.S. citizen or resident. Also may be an estate or qualifying trust of such person.
Calendar year must be used as the corporation’s fiscal year; exception to this if it can show the IRS that another fiscal year satisfies their business purpose.

Just like a corporation, an LLC is a separate and distinct legal entity. The LLC can obtain a tax ID number, open a bank account and conduct business, all under its own name. The main advantage of an LLC is that its owners (known as members) are not personally liable for the debts and liabilities of the LLC. Let’s say your LLC gets sued and it has to file bankruptcy, then the owners are not required to pay the debt with their own personal money. If the LLC’s assets are not enough to cover the debts, the creditors can’t go after the officers, members or managers for recovery of the debt. For taxes, an LLC may be taxed either as a "pass-through" entity where the profits pass-through to the owners and the owners pay taxes at their individual tax rates or as a regular corporation. The owners of a sole proprietorship or partnership are personally responsible for the debts of the business. For example, if the assets of the sole proprietorship or partnership cannot satisfy a debt, creditors are able to go after each owner's personal bank account, house and other personal assets to pay the difference.