By: Barry E. Haimo, Esq.
March 23, 2017
Why Choose a C-corporation Versus an S-corporation?
While it’s great that you decided to incorporate your business, there are a few different types of corporate structures from which to choose. Below, please find some pros and cons of c-corporations versus s-corporations. What’s important to remember is that both entities are essentially the same for state law purposes; the s-corporation is distinct for tax purposes only..
Choosing to Incorporate Your Business
C-corporations and s-corporations are very similar, with both sharing the following characteristics:
- Limited liability
- Credibility with investors – raising capital is typically easier
- Transferring ownership is typically easy
- The corporation can exist past death of owners
- Easier to establish benefits, including retirement plans
Forming a C-corporation
When you complete the Articles of Incorporation to make your business official, the entity will become, by default, a c-corporation. Additionally, an s-corporation can always become a c-corporation if you change your mind or decide to expand – though if you have intentions of growing quickly and having shareholders outside of the United States, you will have to file as a c-corporation from the get-go.
The downside? C-corporations are taxed twice. Net income is taxed at the corporate level and must be paid by the corporation as a whole. Then individual shareholders have to pay taxes on distributions on their dividends. While dividends enjoy a reduced tax rate, the amount received is nevertheless taxed twice.
Forming an S-corporation
Forming an s-corporation requires a specific request. Why would you want to file to have an s-corporation? The difference all boils down to one word: taxes.
S-corporations have a similar tax structure to a partnership or an LLC. Income passes through the entity and is taxed only one time and at the shareholder level. There may be additional taxes for s-corporations that switch to s-status later on, so if you wish to have s-status, do so within the first 90 days of filing as a corporation.
S-corporations can only have 100 shareholders or less, and all must have citizen or resident alien status (subject to President Donald Trump’s future policies of course on taxes and immigration). There are also certain complications that come with transferring the ownership of an s-corporation. Owners have to include their shares and expenses on their personal returns.
Which Is Better?
There is no “better” or “worse” type of corporation. The structure that is best for your business will depend on the size of your business, your partners, your goals, and the tax structure that you prefer.
If you are filing to be a corporation because you are uncomfortable with the LLC form, you may want to stick to electing s-corporation -status. If you plan to see more growth, or don’t want to go back and forth and file additional paperwork to change the structure of your business, it may save you a headache to skip the s-status and file as a c-corporation.
The ultimate decision is up to you, but if you need more specific guidance and tips about forming a corporation, reach out to a knowledgeable Florida business planning attorney today.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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