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Choose the Proper Business Structure: C-Corp vs. S-Corp

Every business owner must choose a business structure for their business to operate, register and pay taxes. There are several types of business structures for you to choose from, each with implications for your taxes, personal liability, partnerships, and registration requirements. The common business structures including Sole proprietorship, Partnership, Limited liability company (LLC) and Corporation (C corp and S corp).

We will talk about the differences between C-Corp and S-Corp here today.

C-Corporation (C-Corp)

A C-Corp is more complex than other business structures and is suggested for larger companies with many employees. It is a separate entity from those who own it, meaning it can be taxed (or sued) independently from its owners, known as shareholders. They elect a board of directors to oversee major policies and decisions and appoint officers who carry out the daily operations of the business.

Advantages

  • Limited liability for business debts
  • Fringe benefits, such as an employer-paid insurance premium, can be deducted as a business expense
  • Shareholders can split corporate profit among owners and corporation

Disadvantages

  • More expensive to create than a partnership or sole proprietorship
  • Paperwork can seem burdensome to some shareholders
  • Separate taxable entity

S-Corporation (S-Corp)

S-Corporation is similar to a C-Corp except the business is not taxed separately from the owners. S-Corps are also very similar to Limited Liability Companies (LLCs), but with more limitations. The owners, called shareholders, avoid the double taxation of a C-Corp, but the business is limited to 100 shareholders and has only 1 class of stock.

Advantages

  • Limited liability for business debts
  • Shareholders report their share of corporate profit or loss on their personal tax returns
  • Shareholders can use a corporate loss to offset income from other sources

Disadvantages

  • More expensive to create than a partnership or sole proprietorship
  • More paperwork than for a limited liability company, which offers similar advantages
  • Venture capitals aren’t willing to fund S-Corps or any other pass-through entity
  • Income must be allocated to owners according to their ownership interests
  • Fringe benefits are limited for owners who own more than 2% of shares
  C Corp S Corp
Taxation Double taxation Passed through
Ownership Unlimited number of shareholders

Can include foreign investors, other corporations, or entities

Limited to 100 shareholders

Must be U.S. citizens or residents

Cannot have other entities

Stock Multiple classes of stock Only one class of stock
Entity Type Typically larger and more complex Often chosen by smaller businesses
Eligibility Default for corporations Must meet specific IRS criteria

In summary, C Corps are better for larger companies seeking flexibility in stock and ownership, but they face double taxation. S Corps offer tax benefits for smaller companies with more restrictive ownership rules. If a business plans to expand rapidly, attract a large number of investors, or even go public, a C Corporation might be a better choice. For businesses intending to remain smaller in scale, family-operated, or run as partnerships, an S Corporation may be more advantageous. When choosing a business structure, companies should make their decision based on factors such as their size, growth goals, shareholder needs, and tax considerations. It is best to make this decision with guidance from a professional tax advisor or legal consultant.

This column is for reference only and does not constitute legal advice. For guidance on your specific situation, please contact 201-461-0031, WeChat: songlawfirm, or arrange a consultation via email at mail@songlawfirm.com.

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