C corporation Vs S Corporation – Bay Area Accounting Solutions
C Corporation Vs S Corporation
C corporation Vs S Corporation, You are on your way to starting a new business and all set with business ideas and ready with all other things but still struggling with the business structure of your legal entity and are unable to find out the best business structure for your business.
All business structure option comes with distinct pros and cons and provides a different bunch of legal and tax implications, so it becomes very important to select the correct business structure for your new business.
New entities can choose to form the following business structure, which is available in the USA:
We can further classify all the business options into two categories:
Pass through business options
- Sole proprietorship
- Partnership
- S Corporation
1. Pass-Through Entities:
- Sole proprietorship
- Partnership
- S Corporation
2. C Corporation
C Corporation and S corporation are two different business entities structure, the major difference between these two types of business is double taxation, in a C corporation double taxation happens but this is not in an S corporation, there is a number of restrictions in a number of shareholders, shareholders must be US citizens and many more when we form an S corporation.
Both S corporations and C corporations are having its own pros and cons.
The following steps will be the same for any fresh start, so be handy with all this information so that when you can be served in the best possible manner.
Choosing one of the three share-issuing types of corporations
Proposed company name and corporation address
Number of shares authorized
Opening a corporate bank account
Applying for Federal Tax ID (EIN) with IRS
What is a C Corporation:
It is a default type of business in the USA if you do not form your business as an S corporation or forming an LLC it will come as a C corporation as default.
People chose this type of business structure for a lot of reasons as new investments, and fewer tax bills but the main reason for selection is limited liability protection. In this structure of business entity and share, holders are having distinct liabilities, entities liabilities are only limited to its capital.
Pros of C Corporation:
All stack holders and shareholders and directors and subject to limited liability.
Perpetual Existence
In a C corporation, there is no limit to shareholders, any person and corporations and other business entities may become members of the C corporation, and this provides a really great advantage.
Lesser tax rates and all qualified expenses are deductible while doing business.
Ability to issue two classes of shares.
Easier to raise money
It’s easy to dispose of or sell a C corporation in comparison to an S corporation.
Cons of C Corporation:
Double taxation
No personal write-off
Need to file corporate and individual tax returns
How to form a C Corporation:
A C corporation is formed by filing Articles of Incorporation with the California Secretary of State.
In addition to filing the Articles of Incorporation, it is necessary to conduct the first meeting which includes the first shareholder and director meeting to form bylaws for the corporation. These laws will govern how and who runs the organization.
A federation tax ID also called EIN is to be applied for with the IRS and within 90 days of forming the corporation, it is necessary to file an annual statement of Information or SOI which is a document/form describing details about the directors and officers of the corporation.
What is an S Corporation?
S corporation enjoys a specific tax advantage provided by IRS, which allows pass income, expenses, and deductions to its shareholders, in other words, an S corporation is not liable to pay tax, its shareholders split taxes among themselves and report this in their personal tax returns, it avoids double taxation.
Pros of C Corporation:
Avoid double taxation
Less Self Employment taxes
Easy pass-through deductions and expenses
Restrictions on the residential status of owners.
You cant form an S corporation you can transfer any existing company to S Corporations.
S Corporation Vs C corporation:
Investment Options:
Both S Corporation and C Corporation can issue shares for raising money C corporation can offer common and preferred stock but S corporation can only offer one class of stock.
Common stack comes with voting rights but preferred stock hold prefers rights to dividends and profit distributions.
Shareholders:
For both S corporation and Forming a C Corporation ownership right can be divided among multiple individuals called shareholders, but in an S corporation there may be only 100 shareholders and only citizen may be members but with C Corporation there is no restrictions.
Taxes:
Shareholders for both structures can pay taxes on personal rates and in event of litigation, there is a protection of personal assets.
In a C Corporation business pays taxes on business income and shareholders pay taxes on distribution so dividends may double taxed.
No double taxation in S Corporations.
The following questions must be answered for the proper selection of business structure:
What is your need to raise money by issuing stock?
Who are your future shareholders?
How many vast shareholdings you are expecting in the near future?
Any thoughts on selling the company?
There is no impact of double taxation on the company!
Selecting your business structure is a major decision for your business and it will have a long-term impact on your business, here BAAS can help you to find out the best business structure for your new business and transfer from one structure to another, our experts are here to help you out every step of the business. Once you are done with all R&D about your business plan and other important aspects of the business you can discuss with as and we can help you out with the best business structure that will suit your business in all possible manners.
Bay Area Accounting Solutions decidedly provides you assistance in selecting your business structure and forming in in a legal way.
