Question: We discussed forming an LLC, but I’ve had some people recently tell me that I should create a C Corporation instead of an LLC. They said that the C Corporation gives the best tax advantages. I read on your website, that “Arizona recognizes that corporations may be formed for profit or not-for-profit, but not as C or S corporations.” So maybe what I’m hearing from these other people is that they are in other states and their laws are different from Arizona law regarding C corporations?
Answer: If a person tells you that you should form a C corporation you should run away as fast as possible because that person doesn’t know what he or she is talking about. No state in the U.S. has something called a C corporation. All states have for profit corps and nonprofit corps. The term C corporation refers to one of four methods of income tax under the Internal Revenue Code of 1986. The person that says form a C corp or form an S corp is confusing the type of entity formed under state law with the method of federal income tax under the Internal Revenue Code.
There is something in the Internal Revenue Code called subchapter S, which provides for how an entity that elects to be taxed under subchapter S is taxed. There is another subchapter called subchapter C, which provides how entities taxed under that chapter are taxed.
Before you form an entity the first question is what type of entity should you form under the law of a particular state. The types of entities are LLCs, LPs, LLPs, LLLPs, general partnerships, for profit corps and nonprofit corps. In Arizona, the LLC replaced the for profit corporation as the best entity to form. For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business see my article called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?”
After you form the entity under the law of the chosen state the next question is how should the entity be taxed? An LLC can be taxed as a C corporation under subchapter C by filing an IRS Form 8832 with the IRS. When the LLC files the Form 8832 you can then say the LLC is taxed as a C corporation, but the entity remains an LLC.
To learn more about the four ways an LLC can be taxed read KEYTLaw attorney and former CPA Richard C. Keyt’s article called “How are LLCs Taxed?“