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Comment by leepowers | Hacker News Reader

Partnerships, S-Corps, LLCs are pass-through entities - meaning profits are treated as self-employed/contractor income, and excluded from corporate taxes (though you can elect to have an LLC taxed as a corporation, which may be advantageous in certain situations). However, pass-through income is subject to self-employment taxes, which currently sit at about 15%.

S-Corp - if your business is earning a lot of profit it can make sense to pay yourself a salary and the remainder of profit as a distribution, which is not subject to the 15% self-employment tax: https://turbotax.intuit.com/tax-tools/tax-tips/Small-Busines...

C-Corp - For a company you founded a QSBS or Qualified Small Business Stock can be excluded (in whole or in part) from capital gain taxes. So, as your company grows year after year, and it's valuation rises year over year, this can save a lot of money when selling: http://www.lexology.com/library/detail.aspx?g=dde20f35-2d5e-...

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(though you can elect to have an LLC taxed as a corporation, which may be advantageous in certain situations)

This is really the crux of what I was trying to understand...thank you for catching that. Can you expand on this as to why it is advantageous to be taxed as a corporation? Tax rates for corporations all are higher than personal tax rates. I assume the 15% self-employment tax is the difference, or is there more?

It is a conversation best taken up with an accountant.

If the organization is set up as an LLC, with a tax status as a partnership taxation, the activity of the organization is going to show up on the investor's taxes.

Investors generally are not interested in seeing new tax items show up on their tax return, because of an investment. The tax details arrive on a form to the investor called a "K-1". Look up "IRS K-1" for background.

Investors generally prefer capital gains, upon sale of the stock. And simple dividends, and perhaps interest income. Not a three-page list of items flowing from the startup's own activity scattered all over the investors tax return.

Some investors, such as university endowments, and the like, also do not want the pass-through tax items from partnership tax treatment, and cannot make use of them either, since they are arms of the tax-exempt university, thus demand instead investments in C-Corp status entities.

As for location of incorporation, many huge, and many smaller organizations incorporate in their home state. It's an entirely separate question and topic, not to be conflated with tax filing status.

One more thing,

With pass through entities (eg LLC, K-1), you can accidentally pass on tax liabilities without disbursements. So your investors may be on the hook for taxes without receiving income.

If you are ever planning on seeking investors, do yourself a favor and skip straight to C-corp.

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