Forming a Business: S-Corp or C-Corp?
When starting a new business, or deciding to change your existing structure, one of the biggest decisions you will face involves S-corporations versus C-corporations. Each type of corporate structure offers benefits and drawbacks that will affect your business uniquely, depending upon your individual business situation. Since this is a decision that will affect your company’s organizational structure and the way it is taxed for years to come, consult with our business attorney before finalizing your choice. In the meantime, the following information can help you focus your attention on whether a C-corp or an S-corp makes more sense for your situation.
Similarities between S-corps and C-corps include:
- Both offer limited liability protection to owners.
- Both are considered separate legal entities.
- Formation documents are filed with the state.
- Structure and responsibilities of involved parties is identical, with both types of corporations having shareholders, directors, and officers.
- Corporate formalities, such as stock issuance, bylaws, annual reports, and so on are the same.
Differences in taxation:
- C-corps are separately taxable entities, and must file and pay taxes at the corporate level. Taxes are paid at the corporate level, and then again on dividends at an individual level.
- S-corps are pass-through tax entities. While an informational tax return is filed with the IRS, no taxes are paid at the corporate level. All taxes due are paid at the individual level, by the owners.
Differences in ownership:
- C-corps have no restrictions on ownership.
- S-corp ownership is restricted to no more than 100 shareholders, who must be US citizens or legal residents, or qualified trusts.
- S-corps cannot be owned by C-corps, LLCs, partnerships or many types of trusts.
- S-corps can have only one class of stock, while C-corps can have multiple classes.
As you can see, C-corporations are generally more flexible, and often are the better choice when you are expanding your business or plan to sell it. However, there is never a one-size-fits-all solution for any business. Careful consultation with our business attorney can help you decide between forming a S-corporation or a C-corporation.