C Corporations Or S Corporations?
Entity selection is a very important matter that requires a careful analysis of relevant facts and circumstances. The best entity must be chosen to avoid negative financial consequences from occurring.
C CorporationsIn many ways, a C corporation, is a “default” corporation. In fact, C corporations are the entities people perceive of when they hear the word “corporation.” When you form a corporation, by filing articles of incorporation, a state government categorizes the corporation as a C corporation. However, if later explicitly elected otherwise, the corporation can be labeled an S corporation. As an entity, a C corporation, offers advantages to business people seeking to further a business agenda. For instance, a C corporation can have an unlimited number of shareholders and simultaneously allow the C corporation to expand the business easier. Besides, a C corporation can not only be differentiated from an S corporation, yet several new investors can be recruited.
The shareholders of a C corporation own a portion of the underlying business and have liability protection. The shareholders will not be liable if debts are incurred by the corporation. Furthermore, shareholders of a C corporation, receive dividends from corporate profits, meaning that they receive a share of the profits depended on their ownership percentage. As discussed, dividends, are unique to a C corporation because S corporations and other small business entities distribute income to shareholders but do not give “dividends”.
Questionably the most noticeable feature of C corporations is how they are taxed. C corporations are subject to “double taxation,” the income they generate is taxed at the federal corporate tax rate and then again when that income is sent to shareholders in the form of dividends. Thus far, this double taxation of the C corporation is one of the main drawbacks of entities and the top reason why some business people choose instead to create a S corporation.
The S CorporationS (small business) corporations are corporations which have chosen to be taxed as partnerships and other small business entities. S corporations, therefore, have the benefit of pass-through taxation. All the income generated by the S corporation passes directly through to the individual shareholders and is reported based on their individual returns. Unlike C corporations, a S corporation is not subject to double taxation. For this reason, S corporation is the preferred choice for many business people. However, S corporations can only issue one class of stock, unlike C corporations. In fact, C corporations have an advantage over S corporations mainly because C corporations offer investors different classes of stock based on the circumstances.
S corporations cannot exceed more than 100 shareholders; most likely because an S corporation is seen as a small business entity and these corporations need to have some form of cap on the number of possible shareholders. A maximum of shareholders should certainly be considered when a person decides to make their entity selection, because S corporations are not eligible to be publicly traded. Accordingly, if the growth of a business is impacted by the size, then electing S corporation status may be ill-advised. Eventually, it becomes clear that each of these entities have distinct strategic advantages depending on the situation. It is up to business owners to account for all relevant facts before making an informed choice. If owners, that can deal with the limitations of S corporations, want to take advantage of pass-through taxation then taking this route could be the best decision. If, however, owners want more room for expansion and can handle the double taxation of C corporations, then the C corporation route is best suited.
In the end, memorizing the tax implications of C corporations and S is painstakingly tedious. But this is exactly why our clients come back to us time and time again when they need expert counsel. Our top Miami tax attorneys diligently spend their professional time on rectifying difficult matters so that our clients do not have to worry about them. If you have a question about the tax consequences of selecting an entity, or any other business or tax issue, contact the firm of Jurado & Farshchian, P.L., and we will assist you right away.
From structuring your business, to preparing your internal operating agreements and shareholder plans, to implementing legal protection in your service contracts, we are here to help strengthen your business now, and in the future. Hiring an experienced Business Lawyer to assist you during formation of your new business is a must.