Whether you are starting a new company or restructuring a pre-existing one, the decision of how to incorporate your business is not easy. This often-critical choice can be even more difficult when choosing between forming as an S corp or C corp. While they both provide an equal amount of personal asset protection for their owners, the tax, financial, and operational implications are much different. Here are the most important things to think about when making the distinction between these two highly formal business types.
What they have in common
Both of these corporation types require a great deal of paperwork and formal processes to remain in compliance with the rules and regulations placed on them. While an S corp is slightly more lenient with these formalities, both of these structures require a great deal of administrative and organizational work. Annual shareholder, director, and officer meetings are required of both types. Both require formal articles of organization and other documents to be accurately filed upon company formation.
As far as mandatory leadership structures are concerned, the requirements are nearly identical: owners must establish and identify a board of directors, and the officers and the owners of the company are listed as shareholders. These shareholders are in charge of electing leaders; this election process must be clearly and accurately documented.
Most importantly, both structures provide personal asset and legal protection for their owners or shareholders. In the event of serious unforeseen circumstances, this protection can be a great asset. Once the filing process is successfully completed, both types of corporations become stand-alone legal entities, completely separate from the individuals that own them.
While both of these corporate structures have definite similarities, they also have some very important and notable differences.
The S corp
Taxes — S corps are eligible for pass-through taxation, which means that the tax implications of the business are reflected on the personal income of their owners. This is very similar to the way that LLCs are taxed. For many organizations, this is a benefit—owners can avoid being taxed twice (profits taxed first as the business’s income and again as personal income).
Ownership — S corps trade their tax benefits for strict ownership restrictions. They are limited to only 100 owners (or shareholders), and these individuals must all be legal U.S. citizens. Trusts and other subsidiary companies are not eligible to become part of the ownership structure. This can be a serious limitation, depending on the nature of the business and how it plans on generating it is funding or financing.
Filing — In addition to the typical incorporation documents, S corps must file a special consideration form with the IRS, Form 2553. This can be a relatively complicated and time-sensitive process; it is encouraged that you contact a business filing professional for assistance when taking care of this step.
The C Corp
Taxation — C corps are separately-taxable organizations, which means their owners must file both a corporate tax return and personal tax return. This often means that they will be taxed twice on their businesses profits, once when the business claims income, and again when they claim profits as personal income.
Flexible ownership — C corps have the most flexible ownership structures, in that they can sell stock in their company to anyone by “going public”. As a result, this gives the C corp many more funding and financing options than any other type of business. Venture capitalists typically only choose to deal with C corps. There are no restrictions on the number of owners (shareholders) that they can have, and they can be owned by individuals from any country. This makes them prime candidates for quick exit strategies, and rapid growth models.
Swyft can help!
Still not sure if an S corp or a C corp is the ideal structure for your business? The experienced business professionals here at Swyft are available to guide you through your options.Contact us today!