|
Getting your Trinity Audio player ready...
|
Table of Contents
All about business structures: C Corp vs S Corp
For a business it’s important to know about various corporation aspects. This is important because the type of business you have might benefit from any one of the corps. So, if you are confused between C corp vs S corp business, we’ll help you in finding the right business corporation type for your business operations. To give you a basic idea, a C corp is ideal if you aim to make your business public in the near future, while an S corp is better for new-startups and small companies. It is als important to note that each business has its own strengths and drawbacks. There are also multiple differences in terms of taxes.
In this article we aim to contrast between an S corp and C corp so that you can determine which is the best choice for your business. So, let’s dive in and learn more about these C corporations and S corporations.
Definition of Corporation
A corporation can be defined as a legitimate organization that is regarded as a unique entity distinct from its owners. According to the law, a corporation has many of the same privileges as a person but corporations have the ability to lend and loan money, take legal actions or be sued, enter agreements and own resources, employ people and involve themselves in the payment of taxes.
Furthermore, an important aspect of a corporation is its restricted accountability. This translates to the company owners and shareholders not mutually involved in any of the capital depreciation, debts, thus this makes it a strong perk of a corporation for business owners.
Understanding C Corp
A C corp can be thought of as a type of corporate structure and a type of corporation. A capital can become a C corp for tax or legitimate and administrative motives. In Terms of the organizational leadership structure, a C corp has an appointed board of directors that is elected by the company’s shareholders.
Understanding S Corp
An S corp is the second type of corporate structure. It can be defined as a contrasting corporation within the division S of Chapter 1 of the IRS code. This legitimate organization is responsible for undertaking processes like income, losses, deductions and credit through shareholders for federal tax purposes and has a reassurance from double taxation and limited liability. You might have gotten the idea by now that while an S corp facilitates certain safeguarding standards that a C corp doesn’t, it generally also has more restrictions imposed.
Contrasting between a C corp and S corp
One of the significant differences between a C corp and an S corp is the method in which they are taxed by the IRS. A C corp files its own tax returns and has its profits and losses remain in the business. For this reason, a C corp has to pay 21% consistent tax on profit but it isn’t obliged to pay any sort of tax on earnings.
For an S corp, the profits and losses metrics are directed through the shareholder. In this way shareholders can declare it on their personal tax return. If your business is an LLC, then it can taxes either as an S corp or a C corp.
Further differences between an S corp and a C corp incorporate the structure and ownership of the business. In this case a C corp is thought of as the corporation for an example. Things for incorporations should be listed in your specific state. The S corp has to complete this documentation besides filing Form 2553.
When it comes to actually acquiring a business, C corps have very few limitations and in theory, anybody can own a corporation and there is no limit on the amount of owners that are allowed. S corps however, have a mandatory limit on proprietorship. An S corp is limited to 100 shareholders.
Let’s find out some more differences between an S corp and C corp.
Origination
For the formation of a C corp, you need to first formulate a corporation. Important thing here is to align your formulation while simultaneously conforming to your state laws. This process requires selecting a name for your corporation, formulating items of incorporation, recording it with the secretary of state, assembling corporate bylaws, choosing directors, and summoning the inaugural board of directors meeting. We are taking a C corp here as an example for formation because it is essentially the basic corporate structure. You can change from a C corp to an S corp by classifying a distinctive form with the IRS. The IRS form 2553 is utilized for this endeavor. Make sure to properly fill it, file it and sign it from all the shareholders.
Formation Price
Taking in estimation the market data, a standard formation for an S corp is about a little more than $1000. On the other hand, the market data indicates that a C corp can be formed with just a little more than $600. Contemplating these figures, it is safe to say that these costs are quite decent particularly if we contemplate that you have the chance to begin your own business.
Taxes
S corps are free from paying corporate income taxes because the company’s own shareholders divide the income and file it on their own personal income tax. This is a clever way for S corps to steer clear of double taxation.
C corps have an entirely different method for taxation. A C corp just has to pay corporate income tax on the income it generates. That income is calculated after cutting the credits, losses and deductions. The C corp can then reimburse its shareholders the remittance and the shareholder has to pay the personal income tax on this remittance. This process is often called double taxation and this can be one of the demerits of sustaining a C corp.
Stake Ownership
The US citizens and residents both are eligible to own an S corp or become a shareholder at the very least. An S corp can have a maximum of 100 shareholders. The notable thing here is that even 18 year olds are eligible to become a shareholder for an S corp. However, multiple institutions like associations, partnerships and trust are disallowed to hold a stock in an S corp.
Additionally, the stake ownership/membership requirements for a C corp are much more flexible for C corps as compared to an S corp. For example, you don’t need to be a US citizen or resident to become a shareholder in a C corp.
Share Class
Share class or class of stock is a significant factor of the publicly traded business. For an S corp it is mandatory to have one class stock only. In this regard, it tends to have a single share class when all shares of stock have similar rights of liquidations and allocation measures.
While a C corp is permissible to have multiple classes of a similar stock. Furthermore, the greater part of voting rights are preserved.
Shareholder Formation
One of the main differences between the C corps and S corps is in the way of formation of the corporation’s shareholders. S corps have to have the base of operations inside the United States and the owners/shareholders must be citizens of the United States of America. While the C corps can have the base of operations anywhere in the world and owners aren’t strictly fixed to be U.S. citizens or residents.
In terms of tax proceedings and business models, it’s quite tricky to say which one is the ideal choice. This rather comes down to your own particular situation and the type of business you have.
Remember to always ask for guidance from professionals when making an important decision for the formation of your business. For these endeavors, you can try contacting a tax professional or legal advisors. These guys can provide you the vision in terms of what choice is better for you. A flexibility that you have in terms of business evolution is to change your business structure whenever the need arises.
The Verdict
Both the S corp and C corp are legal establishments for businesses. They do have their shares of similarities and have aspects of differentiations as well. It is also important to understand your own situation and decide your priorities in terms of aspects like lifestyle, tax bracket and income.
Additionally, a deciding factor can be the tools you use in shaping up your company.
