One of the most important questions a prospective business owner is faced with is how to structure their business. The different types of businesses offer certain benefits as well as draw backs. It is therefore important to understand the various possibilities in order to select the option that best fits the goals for the business.
What is a C-Corp?
C-corps are owned by shareholders. Business decisions are made by a board of directors, who are elected by the corporation’s shareholders. C-corps are their own legal entities. This means they are not an extension of their owners, and the owners can change without impacting the status of the C-corp. This also means that the owners have limited liability. With few exceptions, owners cannot be sued personally if the corporation does something wrong, and they cannot be required to pay corporate debts.
What is an S-Corp?
Unlike a C-corp, an S-corp is not its own entity for the purpose of taxation. Instead, owners are taxed based on the net profits or losses. Owners of an S-corp are referred to as shareholders, and the shareholders do enjoy limited liability. This means that shareholders’ assets are protected in the event that the corporation is liable for debts.
One of the main differences between C-corps and S-corps is the way in which they are taxed. C-corps are subjected to “double taxation.” This is because the corporation is a separate taxable entity, responsible for paying its own taxes. Thus when the corporation has profits it is taxed on those profits. Then when shareholders take distributions, they can be taxed a second time.
S-corps, on the other hand, are not taxed in this way. Instead, the taxes on S-corps occur at the shareholder level only. These differences in how these two types of entities are taxed is one reason some people opt for an S-corp over a C-corp.
S-corps might have tax benefits, but there are some restrictions placed on an S-corp that are not present in C-corps. For one, only American citizens or legal residents can be shareholders in an S-corp. A C-corp can have foreign investors. Additionally, an S-corp cannot have an owner who is a business entity, while a C-corp can. S-corps are also limited in size because they can only have 100 shareholders or less. There is also only one type of stock that shareholders can have in an S-corp, while C-corps can have various stock types.
It is important for any prospective business owners to the take time to research the different options for creating business entities. The potential benefits and drawbacks to each form of entity need to be compared to the individual needs of the new corporation and to the goals for the future of the corporation.