Whether you are growing a small partnership or establishing a new company altogether, incorporating is a major step in the evolution of your business. Choosing the right corporate structure is key to fulfilling your goals, so you need to take some thought and preparation before filling out all the paperwork needed to establish your entity.
Here, we’ll take a look at C-Corporations and S-Corporations in particular and go over the strengths, weaknesses, and uses of each.
Corporations in General
First, it’s important to know how corporations work in general. In some cases, an entity may be better off not incorporating at all, so if your business expenses are negligible or nil, you have almost no one in the business besides you, or if there is very little risk involved in your business operations, it may not be necessary to incorporate.
The purpose of a corporation is to establish a distinct entity separate from the owners. This means:
- Liability from business operations is limited to the corporate level—personal assets are protected
- The corporation is taxed as a separate entity from the owner or shareholders
- The business continues to exist indefinitely, even if ownership changes
- Business expenses may be deductible from taxes
In order to qualify as a corporation, your business needs to file formation documents with the state, adhere to a corporate structure (shareholders, directors, officers, etc.), adopt bylaws, file annual reports, pay fees, and so forth.
A C-Corp is any separately taxable corporate entity, which means it is taxed separately from its shareholders. As such, they are often subject to double taxation—once at the corporate level and once more on that of its shareholders. For this reason, many corporations elect for S-Corporation status.
The benefit of forming a C-Corp is there are no limits on the number of shareholders or classes of stock the company may have, making it a very flexible option for those who wish to grow or sell their business.
An S-Corporation is an entity that has elected for taxation under Chapter 1, Subchapter S of the Internal Revenue Code, and as such, is not subject to federal taxes. Instead, its income is passed on to its shareholders, who then pay taxes on whatever they receive. In other terms, S-Corps are “pass through” entities in that their taxes pass through to their shareholders.
To qualify as an S-Corp, an entity must fulfill the following requirements:
- S-Corps have no more than 100 shareholders
- All shareholders are U.S. citizens
- The company has only one class of stock
- The company must be a limited liability entity
Entities wishing to elect for S-Corporation status must satisfy these requirements and fill out Form 2553 with the IRS.
Given the limitations, an S-Corp is best for smaller businesses that wish to minimize their tax liability, but have no intentions of growing or selling anytime soon.
Choosing the Right Entity
Choosing your entity type is best done with the consultation of a corporate attorney. Their experience with corporate and tax laws will help you choose the type that will best help you meet your goals. To learn more about S-Corps and C-Corps, contact Hart David Carson, LLP, today.