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Are you contemplating registering a corporation for your business but unsure whether a C Corporation or S Corporation would be more suitable? Keep reading to find out.
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) holds
shares of stock in the corporation and is not in legal danger for the acts of the
There are several types of structures within this entity, but two of the most recommended by CPAs and attorneys are registering for S and C corporations. Keep in mind that every state has different laws when dealing with these business entities.
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 boasts 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.
Advantages and Disadvantages of C Corporations
- Unlimited Number of Shareholders
- Fewer Criteria
- Lower Maximum Tax Rate
- More Options for Raising Capital
- Corporation’s Earning Taxed Twice
C Corp Status Requirements
To register a C Corporation in the United States, certain requirements must be met.
- Incorporation: The business must be formally incorporated by filing the necessary documents, usually with the state in which it intends to operate. This typically involves preparing and filing Articles of Incorporation or a Certificate of Incorporation.
- Shareholders: A C corporation can have an unlimited number of shareholders, and they can be individuals, other corporations, or even foreign entities. There is no restriction on the residency or entity type of shareholders.
- Directors and Officers: The corporation needs a board of directors to make major decisions and officers to run the day-to-day operations. In some states, a corporation can have a single director/officer, and it can be the same person as the shareholder.
- Business Purpose: The corporation must have a clear business purpose, indicating the nature of its operations and the products or services it provides.
- Election of C Corporation Tax Status: By default, corporations are considered C corporations for tax purposes. However, to be officially recognized as a C corporation, the business must file Form 2553, "Election by a Small Business Corporation," with the IRS within 75 days of incorporating or before the start of the following tax year
- Tax Identification Number (TIN): The corporation must obtain a Tax Identification Number (TIN) from the IRS, also known as an Employer Identification Number (EIN). This is necessary for tax reporting and other financial transactions.
- Compliance: C corporations must comply with various federal, state, and local laws, regulations, and reporting requirements. Failure to comply can result in penalties or loss of certain privileges.
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.
Advantages and Disadvantages of S Corporations
- Allows for Limited Liability of the Owners/Officers/Directors
- Typically Runs on a Calendar Year
- Full Disclosure of Corporate Owners
- Pass-Through Taxation
- Profits Are Taxed Even if Not Distributed
- Limited Number of Shareholders
- Shareholder Restrictions
- Stricter Criteria
S Corp Status Requirements
Your business must meet specific requirements before you can register an S
Corporation and qualify for its status. Here are the key qualifications:
- Eligible Entity: Your business must be a domestic corporation formed under state law. Certain entities, such as partnerships, LLCs (Limited Liability Companies), and non-resident alien shareholders, are not eligible for S Corporation status.
- Number of Shareholders: S Corporations are limited to 100 shareholders. Additionally, family members can be treated as a single shareholder under certain conditions, allowing for family-controlled businesses to maintain S Corporation status.
- Shareholder Eligibility: All shareholders must be individuals, certain trusts, or estates. Corporations and partnerships cannot be shareholders of an S Corporation, with some limited exceptions for wholly-owned subsidiaries.
- One Class of Stock: An S Corporation can have only one class of stock. This means that all shares have the same rights to profits and liquidation proceeds, providing equal treatment to all shareholders.
- Election of S Corporation Tax Status: Like C Corporations, to be recognized as an S Corporation for tax purposes, the business must file Form 2553, "Election by a Small Business Corporation," with the IRS. This election should be made within 75 days of incorporating or before the start of the tax year in which S Corporation status is desired.
- Fiscal Year: S Corporations typically follow a calendar year for tax purposes, but they can elect a fiscal year under certain circumstances.
- Resident Status: The corporation must be a domestic corporation, meaning it must be incorporated in the United States and be subject to US laws.
Register Your Corporation with NCH
Don’t delay; take advantage of the protections the law affords you and your business today. Still undecided on the best state to incorporate? Let our Nevada business formation experts help you decide which entity is right for you. Call 1-800-508-1729 to get started!