When it comes to starting a business, one of the most important decisions you will make is choosing the right legal structure for your company. Two popular options among small business owners are S corporations (S corps) and C corporations (C corps). While both types of corporations offer similar benefits, such as personal liability protection and the ability to raise capital, there are significant differences between the two. In this blog post, we will examine the key differences between S corps and C corps, so you can make an informed decision about which type of corporation is right for your business.
First, let's take a look at the similarities between S corps and C corps. Both are considered separate legal entities from their shareholders, meaning that the shareholders are not personally liable for the debts and liabilities of the corporation. This is known as the "corporate veil" and is one of the major advantages of incorporating. Additionally, both S corps and C corps can issue stock, which can be used to raise capital from investors.
Now, let's dive into the differences between S corps and C corps.
Taxes
One of the biggest differences between S corps and C corps is how they are taxed. C corps are considered separate taxpayers from their shareholders and are subject to corporate income tax on their profits. This means that if a C corp makes $100,000 in profit, the corporation will be taxed on that entire amount at the corporate income tax rate. The shareholders will then also be taxed on any dividends they receive from the corporation. This is known as "double taxation."
On the other hand, S corps are considered "pass-through" entities, meaning that the profits and losses of the corporation are passed through to the shareholders and reported on their individual tax returns. This means that there is no corporate income tax on the profits of an S corp. Instead, the shareholders are taxed on their proportionate share of the profits, regardless of whether or not they have received a distribution.
Ownership and Stock
Another key difference between S corps and C corps is the number and type of shareholders they can have. C corps can have an unlimited number of shareholders and can issue different classes of stock, such as common and preferred stock. S corps, on the other hand, are limited to 100 shareholders and can only issue one class of stock. Additionally, S corps can only be owned by U.S. citizens or permanent residents, while C corps can be owned by anyone, including foreign individuals and entities.
Management and Governance
The management and governance structure of S corps and C corps is also different. C corps are required to have a board of directors, who are responsible for making major business decisions and overseeing the management of the corporation. S corps, on the other hand, are not required to have a board of directors and are typically managed by their shareholders.
Conclusion
Choosing the right legal structure for your business is a crucial decision that will have long-term implications. S corps and C corps are both popular options among small business owners, but they have significant differences in terms of taxes, ownership, and management. Before you make your decision, it's important to consult with a business attorney and a tax advisor to understand the pros and cons of each type of corporation and how they will impact your specific business. If you are thinking about starting a business and need to form an LLC? CreateYourLLC.com is the perfect solution for you. Click here to begin ►Begin your Create Your LLC
So, choose wisely, and good luck!