According to Investopedia, “A corporation is a legal entity that is separate and distinct from its owners.”
It is essentially a business structure wherein the organization legally acts as an individual and derives the associated rights and responsibilities. As such, the corporation can enter into contracts, loan or borrow money, own assets, sue or be sued, hire employees, and pay taxes.
Forming a corporation requires filing a document known as Articles of Incorporation. Once this is done, the corporation separates itself from the owners, who now have limited liability for corporate debts.
These corporations come tagged as S Corps and C Corps, a status determined by variables like taxation, the scale of operations, flexibility of ownership, etc. Here, we take an in-depth look at S Corps and C Corps and identifying their respective opportunities, drawbacks, and differences.
C Corp is a business that functions as a legal entity that is separate from the owners. This separation protects their personal assets from creditors. However, it also results in a system that taxes profits from businesses at a personal and corporate level.
C Corp is the default status for any incorporated business. Even corporations that acquire an S Corp status start as C Corps. Most large publicly traded corporations in America are C Corps. Given that it can issue multiple classes of stock and can have unlimited shareholders, it attracts funds through equity financing.
Acquiring a C Corp status grants you the following benefits:
While C Corp is an attractive status, it faces the following limitations:
S Corp is a special status granted to incorporated businesses by the IRS. It allows the business to transfer its corporate income, credit, and deductions to its shareholders. The shareholders then split the profits or losses amongst themselves and report them against their personal tax returns. As a result, S Corps do not have to face double taxation.
However, obtaining an S Corp status is no walk in the park. Here are the prerequisites that one needs to satisfy to be eligible for consideration:
The S Corp status offers you the following benefits:
Despite the wealth of benefits, the S Corp status poses the following impediments:
S Corps and C Corps are both incorporated entities, with the former being a form of the latter. As a result, they share several similarities, these being:
However, the major differences between S Corps and C Corps are summarized in the table below:
Now that the differences between S Corps and C Corps are obvious, you may face a crucial question - which one should you choose?
The answer mainly depends on your business objectives and status.
If you are a new business that aims to achieve accelerated growth and intends to recycle the profits through the organization, then obtaining a C Corp status may be beneficial for you. It also leaves you room to raise money from investors.
On the other hand, if you wish to derive the profits externally and distribute them amongst the shareholders as a “reasonable salary,” then the S Corp status would be suitable for you. In essence, it indicates that the business has reached maturity, and the shareholders will now receive their profits as a salary. However, do remember that you cannot have more than 100 shareholders, and they should all be US-based, which could be a restriction.
Based on these factors, you can now make a calculated decision on the corporation status most appropriate for your business.
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