S-Corp vs C-Corp: Which Legal Structure Is Right for My Business?
Categories:

S-Corp vs C-Corp: Which Legal Structure Is Right for My Business?

When it comes to choosing the right type of corporation to form, there exists a lot of uncertainty. Since starting a business is no child’s play, it is fair to have so many doubts. This confusion can be eliminated by evaluating the pros and cons of the two main types of corporation, an S-corp and a C-corp. Let’s begin breaking down these two structures to find out if it is the right one for you.

What is an S-corp?

An S-corp is a corporation type that is known best for its pass through taxation status. In this corporation the income (profits and losses) of the business is taxed at the individual tax rates of the owners. This gives S-corp organizations the right to avoid double taxation.

What is a C-corp?

A C-corp is a corporation type where the owners or members of the organization are taxed separately from the business entity. This creates an unavoidable situation of double taxation. Despite this big hindrance, C-corp maintains its position as the most prevalent business corporation in the United States of America.

S-corp Vs C-corp

S-corp Vs C-corp

Let us now compare these two types of corporations to find out which one of the two can be more right for your business. They have been pitted against each other and compared as per the following factors.

Ease of Formation

The first comparison factor is ease of formation. If we compare the two, C-corps are believed to be the easier ones to form. This is because, C-corp is considered to be the default corporation type. Whereas if the business entity wishes to become an S-corp, some additional documentation is required. A specific form, Form 2553 has been created by the Internal Revenue System that needs to be filed for S-corp formation.

Personal Liability Protections

It is important to make a note of the fact that both, S-corp and C-corp corporation types offer protection to the personal assets of the owners or members. Here none of the two have an advantage over the other.

Pass Through Taxation

Pass-through taxation is defined as the phenomenon where the profits and losses earned by the business entity passes through personal tax rates of the owners. This is a special benefit that only S-corp can boast of. Unfortunately for the C-corp business entities, the phenomenon of a double taxation status is unavoidable. C-corp corporations pay both the corporate taxes on the business income as well the personal taxes on the personal earnings. This is detrimental to the profits earned by the C-corp business and its owners.

Hence, this is a big factor that will decide the type of corporation that the business must choose to form.

Ownership

Ownership

C-corporations are well known for being the entity that can be owned by anyone. There is no limit set on the number of shareholders or owners of the business. Imagine having no number to abide by and being able to have as many owners of your business as you’d hoped. S-corporations however are limited to a specific number. S-corp business organizations have to abide by the 100 member only rule.

 

So before starting any business entity it is important to carefully analyze if you want to have more than a 100 members at any time in the future.

Scale of Operations

Since S-corps are limited to a 100 members only club and have the legal double taxation escape benefit, smaller and rather newer business entities must choose this corporation type. Whereas due to some states not recognizing the S-corp business structures, it is safer to stick to forming the original and reliable C-corp business structure. .

Final Thoughts

Choosing the best legal structure for your business is of utmost importance as it holds the key for unlocking lifelong success and rewards. So, it is a decision that must be done after careful evaluations and comparisons only. In addition to this, it is also important to apply for licenses and permits of the state of residence like the California seller’s permit and business license of California if you wish to conduct business in this state and so on.