The Secretary of State automatically gives all newly formed corporations C corp status. Some business owners may opt to change this status to S-corp. If you are unsure of which option is better for you, consider these differences.
Many business owners consider the difference in taxation rules to be the primary criterion when deciding between a C corp and an S corp. A C corp business has corporate tax liability. Its stakeholders must also pay taxes on their dividend distributions, making this structure a better choice for corporations that reinvest their earnings. On the other hand, an S corp does not pay any taxes. Instead, it offers a pass-through structure that allows stakeholders to report all of their business income and losses on their personal tax returns, giving them a better individual tax rate than the corporation provides. Moreover, stakeholders may use their personal tax forms to write off business losses that can offset income from other sources.
Type of Ownership
A C corp structure permits unlimited stakeholders and many types of preferred and common stock options. In contrast, an S corp caps the number of possible stakeholders at 100 individuals with a single stock option. A C corp may offer more opportunities to potential buyers or mergers because of unrestricted access to corporate and foreign investors. An S corp structure only allows U.S. citizens to be stakeholders and prohibits dealings with other foreign or domestic entities.
If a C corp provides the same health, life or disability insurance to at least 70% of its employees, it may deduct expenses and other fringe benefits from its corporate income tax. It may also deduct a high percentage of charitable donations, further reducing its tax liability. These deductions do not apply to S-corps; however, small, owner-employed S corp entities can dramatically reduce their self-employment taxes and avoid the C corp’s double taxation.
How To Choose
Deciding to retain your business’s initial C corp status or change it to S corp depends on several factors, including:
- Your business’s size
- Your status as an employee
- How many employees you have
- Your ability to provide benefits
- The extent of your overseas dealings
- Your citizenship status
Fortunately, electing between a C corp and an S corp is not a permanent choice, and you can change the status to benefit changes in your business.
Many business owners struggle to decide if they should register as a C corp or as an S-corp. It is prudent to discuss this with a business lawyer who can help you make the best decision for your circumstances.