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When deciding what type of business to start, you probably do some research on the various types of corporations that are available. The C corporation is one option, and the S corporation is another. While these two types of corporations may appear similar at first glance, there are significant differences between them that require you to choose one over the other if you want to start your own business.
The C corporation structure is the traditional form of business organization. It’s a legal entity that can issue shares and sell to public investors. In the United States, they’re sometimes referred to as “C corps.”
The biggest difference between a C corporation and an S corporation is that C corporations are subject to double taxation. That means when profits are distributed as dividends, there’s a corporate tax levied on them first that is paid by the company, then another layer of taxes on your own income when you receive those dividends from your investments.
Another key difference between these two types of corporations is the number of shareholders allowed. With an S corp, there are limits on how many people can own stock; for example, only 50 employees (or 100 total employees or 200 total shareholders) may hold stock in an S corp—with this limit increase if certain requirements are met.*
An S corporation, or “S corp,” is a type of limited liability company (LLC) that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. For example:
The S corporation has $500 in gross receipts and $300 in expenses during the year. The corporation must pay taxes on the $200 of net profit before distributing it as dividends. If the shareholders must pay taxes at their individual tax rates on such dividends, they will not be subject to double taxation.
S corps avoid double taxation on profits because they don’t pay taxes at the corporate level. Instead, S corp shareholders are taxed on their personal income tax and can file a Schedule C to report business income and expenses. C corp shareholders are taxed on the profit of the corporation, but they can also deduct salaries paid to themselves or other employees, as well as payments made to suppliers and vendors.
C corps may be more limited in terms of ownership structure: only one class of stock is allowed, so your corporation must have only one type of share available—no preferred shares or dividends allowed.
It is important to note that just because a person owns stock in a corporation does not mean that he/she is personally liable for corporate debts and liabilities. In fact, shareholders are generally not liable for corporate debts unless they sign a personal guarantee on an SBA loan or similar loan from the bank. For example, if you own 100 shares of Apple stock, but your cousin borrowed $10 million from Wells Fargo Bank to start his own technology company called “Apple,” then you will still be able to walk away from this investment without getting involved in any legal action against Apple’s creditors (unless of course, your cousin refuses to pay back his loan). If you own all 1 billion shares of Apple stock, then it’s likely that someone will try to sue you personally if they feel like they’re owed money by the company—but having just one share would likely keep them at bay!
S corp shareholders are not personally liable for business debts or liabilities. This means that if the company is sued, and loses, the shareholder’s personal assets cannot be seized to pay for the loss. Also, if a shareholder of an S corporation commits a crime, he or she can be held criminally responsible without any recourse to the corporation’s assets.
However, shareholders in an S corporation may lose their investment in the company if its debt exceeds its net worth (or total assets minus total liabilities). For example, You’re a shareholder of ABC Corp., which has two other owners and $3 million worth of debt—but only $1 million worth of equity. If ABC Corp.’s creditors get tired of waiting around for payment and file suit against you as individuals instead (which they can do), then there wouldn’t be much point in suing them since they don’t really have anything left to take from you anyway!
Unlike S corporations, C corporations have no restrictions on the number of shareholders they can have. This can be beneficial if you have a large number of shareholders because it means that each individual shareholder cannot control the company through their voting power. If you are thinking about incorporating your company in Delaware or any other state and want to know whether an S corporation or C corporation would be right for your business, consider this list of pros and cons:
An S corporation can have an unlimited number of shareholders, but a C corporation can only have up to 100 shareholders.
An S corporation cannot issue different classes of stock with specific rights and privileges attached to each class. A C corporation does not face this limitation.
This means that the following parties are allowed to hold shares in a C corporation:
Corporations are prohibited from holding shares in other corporations for two reasons: First, to ensure that every shareholder has some degree of control over the company’s management decisions; second, so that each shareholder can receive his share of profits directly from the company rather than having them distributed through some intermediary (such as a bank or trust company).
An S corporation is a business entity that is taxed as a pass-through entity rather than as a separate legal entity. Shareholders of an S corp must be individuals, certain trusts or estates, and may not be partnerships, corporations, or non-resident alien shareholders.
In order to qualify for the tax benefits associated with incorporation, it can be helpful to understand the differences between an S Corp and C Corp (C Corps).
The most important difference between a C corporation and an S corporation is that an S corporation is a single-member entity. That means it doesn’t have to follow the double taxation rules that apply to C corporations, which are subject to both corporate income tax and shareholder personal income tax on dividends paid out of earnings.
The other main difference between these two types of companies is in relation to capital gains and losses. When you sell shares in your company as a sole proprietor, any profit you make is taxed at your personal rate (which you may have already paid through self-employment tax), while losses are treated as expenses against other income sources like wages or rental property rent. In contrast, if you sell out after incorporating your business into either type of organization, those profits now become subject to double taxation: first at corporate tax rates then again when they make their way into shareholder’s hands as capital gains taxes on liquidation from an exit strategy sale or buyout plan involving employees who also want stock options in lieu of cash payments for their shareholdings.”
S corporations can only issue one class of stock. Unlike C corporations, which can issue multiple classes of stock (for example, Class A and Class B shares), S corporations are limited to offering one class of equity in their company.
As a business owner, you may have heard that an S corporation provides limited personal liability. This means that if your company gets sued or goes bankrupt and you don’t have enough money to pay off the debts, your personal assets (such as your home) aren’t at risk. However, there are tax implications for this benefit:
Finally, tax planning is not a one-size-fits-all proposition. The type of business you operate, your personal situation, and other factors will impact the best way to structure your business and minimize your tax liability. If you’re an entrepreneur looking for help, contact us today. We’re here to help!
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