Both a C corporation and a Subchapter S corporation allow you to operate your business as a separate legal entity. This provides you with protection from personal liability for corporate debts or if the company is sued. However, there are some fundamental differences between C corps and S corps that people forming a business need to be aware of.
The Law Offices of Mike Ross can provide assistance to individuals starting a business or to companies that want to begin operating as a corporation. Call today to get advice from a San Jose, California business law attorney who can help you to decide how best to incorporate your business.
Differences Between a C Corporation and an S Corporation
A C corporation is both a separate legal entity and a separate taxable entity. An S corporation, on the other hand, allows for pass through taxation. This is one of the most important differences between a C corporation and an S corporation. C corps can be subject to double taxation when a company makes a profit and when that profit is distributed to owners. S corporations, on the other hand, pass through profits and losses to owners who declare the income or losses on their personal tax return.
There are also other important differences between a C corporation and an S corporation that should be considered when deciding which business entity is appropriate. For example:
- Businesses are assumed to be C-corporations unless the business specifically elects to operate as an S-corporation. IRS Form 2553 must be filed by companies to elect to operate as an S corporation.
- S corporations must be domestic corporations and shareholders must be individuals, certain trusts or estates. A partnership, a corporation or a non-resident alien cannot be a shareholder or owner in an S-corporation.
- C corporations also have more flexibility in terms of ownership because C corps are not subject to the same limitations on the number of shareholders. S corporations may not have more than 100 shareholders.
- C corporations can issue different classes of stock including common and preferred stock. S corporations can have only one class of stock.
- C corporations have a greater degree of flexibility in selecting the end of the corporation’s tax year. S corporations generally follow the standard tax year calendar and December is typically the end of the company’s tax year.
Understanding the differences between a C corporation and an S corporation is essential so that you can make an informed choice regarding which corporate structure is right for you. As many as 70 percent of corporations elect to operate as S corps according to Forbes, in large part because of the tax advantages that this corporate structure provides.
The Law Offices of Mike Ross can help you to determine whether an S corporation or a C corporation is the right choice for your business. We can also assist with your initial corporate formation as well as ongoing paperwork and filing requirements. Call today at 408-223-9100 or contact us online to speak with a San Jose business law attorney for assistance with your corporation.
Mike Ross
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