In North Carolina, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. All C corporations are required to pay an annual corporate tax on the amount of income that the corporation reports to the IRS. The tax rate is 6.9 percent.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

North Carolina extends this favorable tax treatment to S corporations. The income your S corporation makes will not be subject to a corporate level income tax.

Partnerships. If you operate your business as a partnership, there is no tax assessed on partnership income. Instead, partners must include their share of partnership income on their North Carolina personal income tax returns.

Limited liability companies (LLCs). North Carolina law recognizes businesses operating as limited liability companies (LLCs). The state treats an LLC exactly like a partnership for tax purposes if the IRS classifies the LLC as a partnership for federal income tax purposes. Accordingly, no income tax will be due on your LLC's net income.