Forming a new business is a major step that should involve a great deal of prior planning. One of the first things you will have to decide on is what kind of form your new business will take. This is an area where you can’t afford to cut corners. You will need to know the difference between a C Corp and an S corp.
The biggest difference between a C and S corporation is taxes. Forming a C corporation may leave you liable to pay tax on the income that is generated by the business. On top of this, you may also be liable to pay tax on whatever income you choose to receive as the owner of the business. You may also be taxed as an employee of the firm.
This is where the advantage of forming an S corp may come into play. To put it simply, an S corp doesn’t need to pay taxes. Of course, this doesn’t imply that you get away free. You and the other owners of the business will be required to report your company revenue in the form of personal income that is then taxed.
S Corps & C Corps Are Formed Differently
Once you get past the issue of taxes, you are also bound to notice that these two types of corporations are very differently formed. Most experts in the industry tend to consider a C corp to be the default corporate model. When you file articles of incorporation, you’re by default considered to be a C corp.
This doesn’t mean that a C corp is the only choice that you have when it comes to starting up a whole new business. But if you want to form an S corp, you will need to take a little extra initiative. You will have to fill the Form 2553. You may also need to file a number of other forms, depending on your state.
Even though many people consider a C corp to be the generic corporate structure, there are plenty who hold an S corp to be the best arrangement for business. There are, however, certain restrictions faced by the owners of S corps that do not apply to people who decide to form a C corp. One of the most important will be the limit placed on how many people can own an S corporation.
As it turns out, S corps are limited to ownership of no more than 100 shareholders. All of them must be citizens of the U.S. This is one area where your personal situation may influence you to consider forming a C corp. Should you decide to do so, you will discover that a C corp has no limits on owners.
Perhaps the last but not least, the question to consider is how easy it will be to file for either type of corp. This is another area where you may give the edge to a C corp. There is a great deal less paperwork to wade through, fill out, and return. Since C corps are considered the default type, it takes much less time.
This doesn’t mean that you should give up your dream of creating a brand new S corp. Just because the number of shareholders is limited doesn’t limit the potential for growth that your company possesses.
In fact, you can start your company with a limited number of shareholders. This may enable you to form a closer and more productive bond with each of them. You can also choose some of your employees to become new shareholders.
It will be up to you to do all that you can to make the right choice when you form your new business. Doing so is crucial because, once you choose, you can’t take it back. You will need to scrap it all and form a whole new company. This is why choosing between an S corp or a C corp will be such a weighty decision.