There are several types of business structures available in California, each with its own benefits and drawbacks. Incorporation can provide a number of advantages, but you should think carefully about the type of corporation that might be right for you. Understanding the difference between an S-Corp and a C-Corp is important so you can decide if one of these corporate entity types might be right for you.
An Overview of the Traditional C-Corporation
A C-Corporation is the default type of corporation. That means that if you wish to have an S-Corporation, you have to elect it by filing a form with the IRS.
A C-Corporation is owned by shareholders. You can have any number of shareholders, who will own shares of stock that determine their percentage of ownership. There can be various types of shareholders, such as voting and non-voting, but that is not required. Virtually anyone can own shares of a C-Corp, including individuals or entities who are not based in the United States.
Although shareholders own the company, a C-Corp is generally run by a board of directors elected by the shareholders. One of the benefits of having a C-Corp is that this entity structure makes it easier to raise venture capital.
A C-Corp pays its own income tax and then pays its shareholders dividends, which are subsequently taxed as personal income. For small business owners, this double tax hit often makes the C-Corp structure unappealing.
S-Corporations: Differences and Benefits for Small Businesses
An S-Corp is treated more like a partnership or sole proprietorship for tax purposes. This is one of the major benefits of this type of entity. Instead of having a separate tax rate for the business, an S-Corp is taxed once—at the same income tax level as the owner. Business owners must elect to have this type of tax treatment by filing IRS Form 2553. All shareholders must consent to this type of classification.
The trade-off for this beneficial tax treatment is that shareholders are a bit more limited. An S-Corp cannot have more than 100 shareholders, and only one class of stock is available. In addition, all shareholders must be U.S. citizens or residents. This business structure makes it harder to raise venture capital, but for smaller companies, especially family-owned businesses, this isn’t a major concern.
When starting a company, it is a good idea to decide on your entity structure as soon as possible so you can take advantage of the tax treatment that would be most beneficial for you. Contact us to learn more about which entity type might be the best fit for your business.
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