December 11, 2022
The path to business ownership can be an exciting one, but certain considerations must be made first, such as what type your business falls under. When forming a business, you must decide what type of entity your business will be. Two common options are C corporations and S corporations. As a commercial litigation lawyer from Silverman Law Office, PLLC explains, the primary difference between a C corporation and an S corporation is how they are taxed.
Before declaring your business as a C or S corporation, it is recommended that business owners receive guidance from a legal team so that their personal interests and business success is protected. In the event of a dispute or litigation, choosing the right business type will be important.
What is a C Corporation?
Generally, a C corporation is the preferred business type if you are planning on selling your company in the future or looking for funding through investors. This is because a C corporation consists of stock. This stock is handed out to shareholders who own the company. Large companies that are publicly traded on the stock market are C corporations. A C corporation is the default type of corporation and requires less paperwork than an S corporation.
The way a C Corporation is taxed is sometimes referred to as Double Taxation because it is taxed both at the entity and shareholder levels. Shareholders pay taxes on salaries, dividends, and bonuses, and the company must also pay taxes on its profits. C corporations may also offer stock to employees as payment, so its employees may be of higher quality.
With a C corporation, charitable contributions and donations can be deducted in full on a corporate tax return as long as the donations don’t exceed 10% of the company’s income. Employees in a C corporation may have certain benefits, such as health insurance, which is deducted from a C corporation’s tax return. C corporations have a capped tax rate of 21%.
What is an S Corporation?
An S corporation is appropriate if you want your business to have limited ownership. While an S corporation can also have stock, it is limited to having no more than 100 shareholders. Additionally, those shareholders may not consist of partnerships, other corporations, or non-resident aliens. An S corporation has tax benefits, however.
Unlike a C corporation, an S corporation is taxed only at the shareholder level and not as an entity. An S corporation does not need to pay taxes on its profits. Instead, its shareholders pay taxes on their personal income. Most of the time, S corporations can deduct up to 20% of their business income on personal tax returns. This means that if you own an S corporation, you may write off business losses on a personal tax return.
There are advantages and disadvantages to owning either a C corporation or an S corporation. If you want to be sure you choose the best type of business, contact a business lawyer who can work with you to choose the one most appropriate for your needs.