C-CORP vs. S-CORP

C-CORP vs. S-CORP

How to decide which structure and tax election is best for you?

Should you incorporate as a C-Corporation or an S-Corporation? To answer that question, you need a clear vision of your business goals. Operationally these entities are similar, yet they have significant differences when it comes to taxation and growth potential.

C-Corporations

C-Corporations, or “C-Corps,” are known as “default” corporations. These entities are the default designations given to corporations when businesses first file their “Articles of Incorporation,” a series of documents unique to each state.

Advantages. Some advantages include the ability to raise capital, the ability to be publicly traded, and the ability to issue multiple types of stock. C-Corps can raise a significant amount of capital because they have fewer restrictions when it comes to shareholders. These entities may have an unlimited number of shareholders and can seek financial backing globally. For these reasons, C-Corps are generally favored by larger corporations.

Disadvantages. However, there is a significant drawback when it comes to C-Corps, and that is “double taxation.” The “double taxation” of a C-Corp refers to the taxation upon the dividends paid out to shareholders individually and on the profit of the corporation itself. This drawback is typically one of the deciding factors in choosing which type of taxation is best for your entity.

S-Corporations

S-Corporations, or “S-Corps,” are different from C-Corporations in that you must explicitly elect to become an S-Corp. To be taxed as an S-Corp you must file Internal Revenue Service Form 2553, also known as “Election by a Small Business Corporation.”

Advantages.  The biggest advantage is lack of double taxation. Unlike C-Corps, an S-Corp’s profits are not taxed, only the income dispersed to the shareholders is taxed. This is the trade-off for S-Corps, in exchange for reduced size they can keep more of their profits, which is why this model is generally favored by small businesses. However, it should be noted that some states do actually “double tax” S-Corp. Those states include the District of Columbia, New Hampshire, Tennessee, and Texas.

Disadvantages. The disadvantages include the limit of a maximum of 100 shareholders, it may only issue one kind of stock, and it cannot be owned by a C-Corp or another S-Corp.

Limited Liability Company Election

Don’t be misled by the “corp” reference, an LLC can also to be taxed as either a C-Corp or S-Corp with the same advantages and disadvantages.

The question of whether to become an S-Corp or a C-Corp can be easily determined with the right guidance. Speaking with a knowledgeable Business Law firm such as Gulati Law, along with your accountant is the best way to determine which structure is best for the needs of your corporation and to set your business up for lasting success.

The Family Owned Business- What You Need to Know!

There are many things members of family owned businesses need to know. Whether you are opening a new business or operating an established family owned business, you must take a good overall look at the structure of your business. It is in our nature to immediately consider our best friend, cousin, uncle or even brother and sister a trustworthy partner, but you never know what different circumstances may occur during the business term.

It is very important that once you consider going into business or adding a family member to your Company, that you structure your assets in the Company carefully, to protect everyone’s interest. You have to be clear on what each individual role will be and what responsibilities each member has. Such clarity can avoid future conflicts as long as it is expressed from the beginning and written in the Corporate Documents.

Also ask yourself, how qualified is this person for the position? Do we share common goals? How much experience do they have? Do you feel confident in sharing equity with this person? Can we keep a professional life and integrity of the company separate from our personal lives? How can I evaluate them? What to do if it does not work out? Do we have a succession plan?

Having a stable business structure will protect you now and in the future and also will provide you with a sense of security.

 

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