S Corporations and C corporations are two of the most popular business entities when a company decides to incorporate. Once you have incorporated your business, you might want to be an S corp or a C corp. If you are choosing between the two, tax concerns are usually the major basis for making a decision.
Just like a partnership business structure, S Corporations do not pay any federal income taxes. The profits and losses of an S corp are passed through to the stockholders. These people will then report the income and losses on their personal tax return. This process is called single taxation.
C corporations, however, face double taxation. Double taxation means that the C corp pays federal income tax. All dividends paid to the stockholders are also taxed.
It is always best to have a corporate lawyer in California to assist you in deciding what business entity is most suited to your company.
Learn more of the differences between S Corps and C Corps by reading through this article:
Advantages of Being an S Corporation
A major advantage of being an S Corp is that income and losses are passed through to the shareholders of the company, and taxes are paid only once. Thus, double taxation is eliminated. It is important to check the laws and regulations of your state regarding this, because some states do not recognize S Corps and will tax the company just like a regular C corp. There are states that charge S Corps as state tax, even if the company will not have to pay federal income tax.
If your business becomes an S Corp, you as the owner are protected from liability. With S Corps, the personal assets of the owner and the shareholders are separate from the company’s assets.
Accounting is also easier with S corps, because you can simply use the cash method of accounting. It’s perfectly alright if you do not have any inventory. Moreover, with S corps you will have more room for investors. In fact, S corps can have up to 100 stockholders!
Disadvantages of Being an S Corporation
S Corps , just like other business entities, are required to file a number of official and federal documents, including the Articles of Incorporation. The company must also hold regular meeting with their stockholders, and the minutes of these meeting be filed. There are also a number of government fees that have to be met regularly.
There are also shareholder restrictions with S corps. In a C corp, shareholders are taxed only when they receive their dividends. But with S corps, the shareholders are taxed for any income that the company has, even if they have not received any portion of that income. Another restriction is that S corps shareholders are only allowed to issue one class of stack. Many investors can get discouraged by this.
Again, in order to know more about what you’re getting into when it comes to choosing a business entity for your company, it is always best to have a corporate attorney in Orange County, California to assist you.