This is the last article in our series regarding business entity types. So far, we’ve discussed four types of entities: sole proprietorships, general partnerships, limited liability corporations, and limited liability partnerships. Now, let’s discuss the last two candidates remaining on the ballot: C-corporations and S-corporations.
C-corporations are treated as separate legal entities from their owners. Consequently, the U.S. government taxes C-corporation owners separately on the company’s profits. C-corporation owners can also pay corporate distributions out to the company’s shareholders.
- Limited Liability: Shareholders have limited liability on their investments in the corporation. If the corporation ceases operations, all that shareholders can lose is their investment in the business. Shareholders do not have to use their personal assets to settle company debts.
- Open Membership: The business can have as many shareholders as its owners want. Owners of a C-corporation can also offer multiple stock options.
- Capital: It is easier to raise capital for a C-corporation because the business owners can sell additional stock to attract investors.
- Initial Costs: Setting up a C-corporation can be expensive. The initial setup costs include legal counsel, who must draft articles of incorporation and corporate by-laws.
- Complexity: C-corporations can be complex because of certain requirements and formalities required by the state of incorporation as well as the state(s) in which they operate. Corporations will need to appoint board members and conduct board meetings.
- Double Taxation: A C-corporation’s profits are taxed twice. First, the owners must file corporate income tax returns separately from their personal income taxes. Then, the dividends paid out to the shareholders are taxed on their individual returns.
The “S” in “S-corporation” refers to subchapter S in the Internal Revenue Code. This subchapter allows for flow through of income or loss to the S-corporation shareholders.
- Limited Liability: As with C-corporations, S-corporation shareholders have limited liability on their investments in the business. The only asset in the S-corporation that shareholders can lose is their investment in the company. The company’s debts do not impact shareholders’ personal assets.
- No Double Taxation: Whereas a C-corporation’s profits are taxed twice, an S-corporation’s earnings are taxed only at the individual level. S-corporation owners do not need to file a separate business income tax return.
- Startup Costs and Regulation: Setting up an S-corporation can be costly. It requires articles of incorporation, articles of organization, or articles of formation to operate as a legal entity. If the business satisfies all requirements, it must then file a subchapter S election with the IRS and, depending on where the company is located, its state of incorporation.
- Reasonable Salary: The IRS requires all S-corporation owners and officers to be paid a reasonable salary, even if the entity has a net loss for the year. This can make it difficult for some businesses to make payroll.
- Shareholder Restrictions: An S-corporation is allowed no more than 100 shareholders and can issue only one class of stock. This restriction makes it difficult to seamlessly divide losses or income among shareholders.
Make Your Vote Count
Now that we have described the business entity selection candidates’ platforms, we hope you can make an educated decision on whether to incorporate your company. If you still need assistance in choosing your entity type, then contact CRI’s team of business advisors. We’re ready to guide you in your choice. We wish you success as you cast your entity ballot!