Considering structuring your business as a corporation? Not sure if a C Corporation or S corporation is best for you? Keep reading to learn more.
What is a Corporation?
Corporations are the most dynamic business entities available offering tremendous flexibility and advantages. It’s also the most secure because it’s considered a 'person' with rights under the law. This means that a stockholder (owner or partial owner) is a holder of shares of stock in the corporation and is not in legal danger for the acts of the corporation.
There are several types of structures within this entity, but the two recommended by CPAs and attorneys are S and C corporations. In explaining the differences, keep in mind that every state has different laws.
On average, C corporations pay less in tax than an individual. It’s also the only tax table where the tax rate drops when you start making millions. That's why every Fortune 500 company is a C corporation.
Additionally, there are no limitations on shareholders. They can live anywhere in the world and be of any entity. Even better, C corps boast fewer criteria than S corps giving you the options you need to meet your objectives.
The main disadvantage of this structure is that it pays tax on its earnings and the shareholders’ dividends. This means a double tax on your corporation’s earnings.
- Unlimited Number of Shareholders
- Fewer Criteria
- Lower Maximum Tax Rate
- More Options for Raising Capital
- Corporation’s Earning Taxed Twice
From tax advantages to flexibility, forming an S corp has many benefits. One such benefit is pass-through taxation. This allows owners to avoid the double tax of C corps making it a popular choice for small business owners.
Both S and C corps allow for limited liability of the owners, officers, and directors but while C corps have no limitations on shareholders, S corps cap the number of shareholders at 75.
There are also more qualifications your company must meet to elect S corp status. Click HERE to see all the requirements.
- Allows for limited liability of the owners/officers/directors
- Typically runs on a calendar year
- Full disclosure of corporate owners
- Pass-through taxation
- Profits taxed even if not distributed
- Limited number of shareholders
- Shareholder restrictions
- Stricter criteria
S Corp Status Requirements
There are certain qualifications that the corporation must meet to elect S corporation status. To qualify for S Corp status, your business:
- Must be a domestic corporation formed in the U.S.A.
- May have no more than 75 shareholders.
- May only have individuals, estates, or certain trusts as shareholders.
- May not have non-resident alien shareholders.
- May only have one class of stock.
- Must be a small business corporation, financial institutions (i.e. banks, insurance companies, building and loan associations, mutual savings, and loan associations) cannot take advantage of an S corporation election.
- Must conform to state statutory restrictions, which limit the transfer of shares/ownership of the company.