While starting a business, you often have different options to choose from, such as LLC, S Corporation, or C Corporation. These corporations entirely differ in their operations. In this particular report, we are going to analyze different aspects of S Corporation and C Corporation.
What is C-Corporation?
C-Corp or C Corporation is a legal structure where the owners are separately taxed from the entity. The “C” in the C-Corp represents subchapter C of the Internal Revenue Code under which C corporation’s income is taxed. In the U.S, C corporations are the most known type of corporations. These corporations offer the maximum level of protection to the owners’ from personal liability. Here, unlike other types of corporations, the shareholders can quickly sell their stocks & leave the business, and this step will not affect the life of the corporation. Any company which is planning to go public eventually will find C Corp an excellent option.
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What is the structure of a C-Corporation?
Any C Corporation has three-tier management, including shareholders, directors, and officers. The shareholders are indeed the company’s owners, and they are the ones who hold the stocks. Although they can influence the corporation, they do not make day-to-day decisions. Shareholders elect the directors of the company, who further takes care of these everyday decisions. Boards of Directors are elected on a yearly basis, and they are obligated to elect the corporate officers, expand the business, authorize the financial decisions, and set operation policies. Officers manage the daily operations of the company. They manage the employees and keep things moving along.
How does a C-Corporation work?
C Corp pays the corporate taxes on the earnings before distributing the dividends to the shareholders. Every shareholder is then subjected to the personal income tax on their received dividend. Here, the ability to reinvest the profits in the corporation at a low tax rate is indeed an advantage, despite the unfavorable outcome of double taxation.
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What are the advantages of a C-Corp?
- The C Corporation helps the owners to get more credibility because the company looks more legitimate to the investors.
- It protects the owners by limited liability protection, which means that the owners’ personal assets are safe even if the company is sued.
- C Corporation offers benefits that are tax-free, unlike some other business structures.
- Because of their complicated tax structure, these are not likely to be audited.
- It is always straightforward to offer the employees the equity with a C Corporation compared to some other business structure.
- The exciting thing about the C Corp is that it keeps the company alive even after the death of the founder.
- C Corporation also provides monetary benefits because it makes it easier to sell stocks, raise money and transfer ownership.
How can you set up a C-Corp in five simple steps?
- First of all, you are required to choose a state where you want to incorporate. Notably, you need not select the state where you live. You can choose that according to the benefits offered by different states.
- The second step is to choose a name for your company and then the board of directors. Notably, selecting the board of directors is crucial because they are responsible for a company to get going.
- It would be best to determine the types of shares that will be issued, for instance, ordinary or preferred shares.
- Next, you are required to designate a registered agent who will be in charge of all the legal activities.
- The next step is to file the Incorporation articles and establish the set of rules to run your company.
You will be all set to issue the stocks after you get the official registration from the government.
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What are the S-Corporations?
S corporations refer to those corporations which meet the specific requirements under the S subchapter of the Internal Revenue Code. In simpler words, it is a corporation treated for federal tax purposes. It is another type of legal business entity where the corporate taxes may pass losses, deductions, business income, and credits to the shareholders. It means that an S Corp can easily pass through most of its income and loss items, just like a partnership or sole proprietorship. Also, it doesn’t involve any double taxation, unlike a regular corporation, i.e., owners are not required to pay the taxes twice. All the shareholders are subjected to their tax rates on the profits.
What are the requirements to obtain an S-Corporation status?
- The corporation should be incorporated domestically within the United States.
- It must have one class of stock.
- The shareholders should meet the eligibility requirements.
- There should not be more than 100 shareholders.
What are the advantages of S-Corporation?
- Any new business operated as an S Corp can establish credibility with potential vendors, partners, customers, and employees because of the owners’ formal commitment to the company.
- It protects all the shareholders’ personal assets, and the shareholders do not have personal liability for the business’s debts. It means that the creditors cannot force them to sell their personal assets to pay the debts.
- It doesn’t pay the federal taxes at the corporate level, and hence, an S Corp can pass through the taxation.
- The ownership can be transferred straightforward without triggering any adverse tax consequences.
- Corporations are usually required to use the accrual methods of accounting, but the S Corps do not need to use the accrual methods if they do not have the inventory.
How can you form an S-Corp?
You need to prepare and file the articles of Incorporation to form an S Corp with proper state authorities. Filing fees and the initial franchise taxes are required to be paid, and the incorporation documentation might vary depending upon the state of Incorporation.
After filing the Articles of Incorporation, you are required to file form 2553 with IRS for electing the S Corporation status for the company. Also, the S Corp needs to hold an initial meeting of directors to adopt the bylaws and undertake the initial corporate actions.
How can the S-Corp and C-Corp be differentiated?
The significant difference lies in the taxes. The C Corps pay the taxes on the company’s income and the owners’ income. On the other hand, an S Corporation doesn’t pay the taxes, and the owners report the company’s income as their personal ones. These are majorly differentiated on three bases:
- Ownership– In a C Corporation, anyone can be the owner, and there can be as many as the owners. While on the other hand, an S Corp can have up to 100 shareholders.
- Taxation– Whereas the C Corps are taxed twice, the S Corporations usually pass through the taxation.
- Formation– C Corporations are actually the default kind of corporations. You’ll be automatically designated as a C Corp when you file the articles of Incorporation. On the contrary, you need to file a Form 2553 to be designated as an S Corp.
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