What are the goals for your business? This is the largest factor to consider when deciding how to incorporate a business.
A C-Corporation is a standard corporation, while an S-Corporation has a special tax status assigned to it by the IRS. The term “S” corporation comes from its definition in Subchapter S of the Internal Revenue Code.
Both types of corporations offer limited liability protection, have similar structures, corporate formalities, and they are both considered separate entities. However, despite their similarities, they have some pretty distinct differences. The biggest difference is how the corporations are each taxed.
C-Corporations are separate taxable entities, and are subject to double taxation. This means that the corporation itself pays taxes, and any dividends paid to the shareholders is treated as personal income and thus subject to additional taxation at the individual level. Conversely, S-Corporations are pass-through entities, and as such are not subject to double taxation. They pay no corporate income tax (although they file form 1120S) and the profit and losses of the business are passed-through onto the stockholders and taxes are paid at the individual level.
Another difference between the two is the C-Corporations have no ownership restrictions, whereas S-Corporations do. S-Corporation restrictions include no more than 100 shareholders and they must be U.S. citizens or residents. They can also not be owned by other corporations, LLC’s, or partnerships. Finally, S-Corporations can only have one class of stock while a C-Corporation can have multiple classes.
LLC’s are great if you want that liability protection without all the formality and paperwork. It’s very easy and cheap to set up. There are also some publication requirements in most states. But if you’re looking to raise capital from professional investors this might not be the best structure. More on that here: Why can’t (or won’t) outside investors fund an LLC?
There are a few more differences but these are the primary ones that impact most people. Given the restrictions that come along with an S-Corporation, a C-Corporation offers a little bit more flexibility when starting a business. This especially holds true if you plan on growing the business or raising large amounts of money or want to have preferred shareholders.
If you need help forming your business then visit. We’re a legal marketplace for individuals and businesses to hire top lawyers for their legal stuff. Finding the perfect lawyer to help incorporate your business is a huge time sinker. But it goes without saying that solid legal representation is essential to keeping your company operating smoothly and avoiding some of the early stage pitfalls. Feel free to check us out and connect. We offer free consultations!