Incorporation is the most popular way to start a business in the US. More than 70% of new companies choose to register as corporations. Of those, more than three of four corporations elect to incorporate and be taxed as an “S Corporation” instead of a “C Corporation.” Here are some things to know to help decide which type of incorporation may be right for a business.
What is a C Corporation?
C Corporations are a legal business structure that separates the income and assets of the company from that of the owner(s). This structure shields the owners from personal liability for the obligations and debts of the corporation. C Corporations must pay corporate taxes before distributing dividends to shareholders. Shareholders also pay personal income taxes on this distribution.
When incorporating, the company must establish a board of directors and write corporate bylaws. Corporations are also required to hold an annual shareholder’s meeting and keep the meeting’s minutes.
What is an S Corporation?
S Corporations enjoy all the limited liability protections of C Corporations and are subject to the same incorporation requirements. What sets an S Corporation apart from a C Corporation is primarily how profits, losses, deductions, and credits are treated.
S Corporations are “pass-through” entities. This means their shareholders report the stream of income and losses from the corporation on their personal tax returns.
With this structure, shareholders pay tax at their individual income tax rates. Double taxation of income generated from a corporation is avoided. Generally, the S Corporation itself does not pay any income taxes.
S Corporations Must
- Be owned by US citizen(s)
- Have no more than 100 shareholders
- Have only one class of stock
Which Corporation is Right?
S Incorporation may allow for the realization of business gains and losses on a personal tax return. But a C Corporation could benefit an owner’s overall tax burden if they have a higher individual tax rate than the corporate tax rate. Planning for the future and growth of your business is important as well. C Corporations may issue different classes of stock, while S Corporations are limited to only one type of stock offering.
The decision of which type of incorporation to pursue will ultimately depend on the needs of the business and its owner(s). Please consult with your tax advisor when deciding what type of structure is better tailored to you.
When you are ready to file for incorporation, Midland Forms can help simplify the process. We complete the filing for you and even assist with preparing bylaws. For more information, please reach out to us at (239) 472-0074.
Written by Nick Betancourt