When starting a corporation, the first thing you need to do is register your business entity with the state. But, there are different kinds of corporate designations you’ll need to consider each with its own advantages and disadvantages depending on your business model.
A corporation is a business structure intended to shield its members from liability such as lawsuits filed against the company. However, a corporation is a completely separate entity from its owners, and as such must follow many of the same rules and regulations that an individual does. Corporations can hire employees, pay taxes, borrow money, and engage in litigation.
There are three main types of corporations you can choose from when determining your business structure:
S Corps are a corporate business structure that are allowed to be set up as a “pass through” entity, meaning the profits and losses of the business pass through its members, and onto the individual’s personal tax returns.
Before creating an S corporation, it’s best to know the pros and cons of S corporations beforehand.
Advantages of S Corporations
Disadvantages of S Corporations
A C Corp is the strongest corporate structure and one that offers the most freedom as far as growth and expansion. Because it’s an entirely separate entity from its members, it must file its own tax return and is subject to double taxation.
Before creating a C corporation, it’s best to know the pros and cons of C corporations beforehand.
Advantages of C Corporations
Disadvantages of C Corporations
Though both structures offer their members limited liability against any lawsuits, there are some major differences. The biggest difference between the two has to do with taxes. An S Corp doesn’t file a return of its own and instead the members report the company's profits and losses on their personal tax returns. This can make things more complicated, but also allows a bit more flexibility with how earnings are declared.
A C Corp must file its own tax return in addition to its members filing their personal return. If the company turns a profit and shares these earnings with its members, the corporation and the members must declare the profits. This is what’s known as double taxation.
Whenever you decide to form a corporation, you should always consult with a qualified CPA to discuss your options and tax implications. In general an S Corporation is better for a smaller business that knows it will stay in the U.S. Under S Corp regulations, shareholders are capped at 100 and they do not allow any non-U.S. members. You may also elect to be an S Corp if you know that corporate taxes are especially high in your state and can be avoided by operating as a pass through entity.
A C Corporation is usually preferred by larger businesses, and especially ones that are expected to grow and expand. There is no limit on the number of shareholders a C Corp can have, and its members can be both U.S. and international citizens. C Corps are also a good choice if you are doubtful of your company’s ability to hold up to tough scrutiny of the IRS.