As a business, you can choose to structure your company as an S-corporation or as a C-corporation. The decision boils down to your ideal tax structure. An S-corp, also called a pass-through entity, has business profits and losses reported on the business owner’s income. A c-corp, on the other hand, ends up taxed at the corporate level and on the owner’s personal income tax returns.
If you’re a small business owner, it might be difficult to understand the differences between S-corporations and C-corporations. It’s easier to categorize the differences into three main areas. These areas are formation, ownership, and taxes.
The most basic difference is the formation. A C-corp is a default type of corporation. If you file articles of incorporation with the secretary of state, then you have a c-corp. If you want an S-corp, on the other hand, you must file IRS form 2553. When you file this form, you become an S-corp for tax purposes.
Ownership is another main difference. The differences come in how the structures restrict corporate ownership. A c-corp provides more flexibility if you want to expand or sell to another company. These have no restrictions on ownership. You can have as many shareholders as you want and different classes of shareholders. Usually, venture capital firms and angel investors prefer corporations. These are not options for S-corps.
S-corps have a limit of one hundred shareholders. The shareholders have to be residents or citizens of the United States. S-corporations are limited to one class of stock. This means that there will only be one category of shareholder. There are no hierarchies or differences between shareholders of the business.
Taxes are complicated, in general. When it comes to S-corps vs C-corps, the taxes are different. A C-corp pays a corporate income tax rate. This is 21 percent. Next, if you take all of the money leftover as a dividend, then you have to deal with the dividend tax rate. This is about fifteen percent.
With an S-corp, your income flows through to your personal income tax return. This means that however much you make, you have to put yourself into the proper tax bracket to find out how much you owe in taxes. Often, being an S-corp might save you money, but this isn’t always the case.
When it comes to S-corps and C-corps, there are a multitude of reasons why someone would pick one over the other. The main differences between the two have to do with formation, ownership, and taxes. Talk to a business lawyer in Melbourne, FL today to help decide which you should choose.
Thanks to the Law Offices of Arcadier, Biggie & Wood for their insight into business law and the difference between subchapter C and S corporations.