10 May Incorporating a Business: S vs. C Corporation
When business is doing really well, there will come a time when the best course of action is to evolve. That would mean becoming a corporation. When a company incorporates, the business will register as a regular corporation. But sometimes, an S corporation is just better for the company especially when it is just starting out. Hower, for an entrepreneur to avail the benefits of an S Corporation, he or she can simply file documents before the Internal Revenue Service (IRS), something that regular corporations need not do. Regular corporations are referred to C corporations.
First, let’s look at the similarities of the two. Both types mean that there will be limited liability on the owners of the company as far as the business is concerned. Incorporating means giving the company—now a corporation—a separate entity. This means that the company will have its own financial records and it can be sued as an entity. The owners will now have limited liability as it has been sucked by the corporation. But as a separate legal entity, it is ruled by a board comprised of directors or shareholders.
The difference between the two corporations lies in the taxes. A C corporation is taxed as a legal entity. But if you file an “S election” before the IRS, then that means the taxes will be shouldered by the shareholders or owners in their personal income tax returns. The advantage of the S corporation, especially if it is just a startup company, is that there will only be one tax—the personal tax return. But a C corporation is taxed twice—the corporation is taxed as well as the individual shareholders.
The S corporation certainly has a great advantage. This is why, expectedly, it is not an option to all corporations. Only those incorporated companies with 100 shareholders or less can be eligible to file paperwork to become an S corporation. There are also other limitations when it comes to ownership: only U.S. citizens or resident aliens can be registered owners or shareholders. C corporations, on the other hand, can have hundreds of shareholders and foreigners can hold shares in the company.
Since most of the companies that prefer to have the regular C corporation have a large employee population, it is understandable that the government would reward owners for giving additional benefits to the employees. C corporations can deduct fringe benefits provided to employees—benefits include health or disability insurance. Shareholders who work for the C corporation do not have to pay taxes on fringe benefits—such as a company vehicle. A shareholder who owns more than 2% of the company cannot deduct fringe benefits.
When it comes to stocks, a C corporation can issue multiple classes of stock while an S corporation can only issue not more than one class. The stocks are advantageous because they carry with them the voting and profit privileges for the shareholders. And because a C corporation allows foreigners to become shareholders, there is a bigger possibility than the company can operate the business in a global capacity—soon.