7 Reasons to Choose C Corp or S Corp for Your Business
If you are starting a business or thinking about changing your business structure, you might be wondering whether to choose a C corporation or an S corporation. These are two of the most common types of corporations in the U.S., and they have different advantages and disadvantages depending on your business goals, tax situation, and ownership preferences. In this article, we will explain the main differences between C corp and S corp, and give you seven reasons to choose one over the other.
What is a C Corporation?
A C corporation is the default type of corporation that is created when you file articles of incorporation with your state. A C corporation is a separate legal entity from its owners, who are called shareholders. A C corporation has its own rights and obligations, and can sue and be sued, own property, enter contracts, and borrow money.
A C corporation is also subject to corporate tax rates, which means that it pays taxes on its income at the corporate level. In addition, shareholders pay taxes on the profits distributed as dividends or capital gains from selling their shares. This is known as double taxation, and it can reduce the after-tax income of a C corporation.
However, a C corporation also has some benefits, such as:
– No restrictions on ownership: A C corporation can have unlimited shareholders, both domestic and foreign, and multiple classes of stock with different voting and dividend rights.
– Better for raising capital: A C corporation can attract more investors, especially venture capitalists and angel investors, who prefer the flexibility and liquidity of C corp shares.
– More employee benefits: A C corporation can offer more tax-deductible benefits to its employees, such as health insurance, retirement plans, stock options, and fringe benefits.
What is an S Corporation?
An S corporation is a special type of corporation that elects to be taxed as a pass-through entity by filing IRS Form 2553. This means that an S corporation does not pay corporate taxes on its income; instead, it passes through its profits and losses to its shareholders, who report them on their personal income tax returns.
An S corporation can avoid double taxation and lower its overall tax liability by choosing this option. However, an S corporation also has some drawbacks, such as:
– Restrictions on ownership: An S corporation can have only up to 100 shareholders, who must be U.S. citizens or residents. It can also have only one class of stock with equal rights.
– Harder to raise capital: An S corporation may have difficulty attracting investors who prefer the flexibility and liquidity of C corp shares. It may also face higher interest rates when borrowing money from lenders who view it as less stable than a C corp.
– Less employee benefits: An S corporation cannot deduct the cost of benefits provided to shareholders who own more than 2% of the stock. This can reduce the attractiveness of offering benefits to key employees.
7 Reasons to Choose C Corp or S Corp for Your Business
Now that you know the main differences between C corp and S corp, how do you decide which one is right for your business? Here are seven reasons to choose one over the other based on your business goals, tax situation, and ownership preferences.
1. Choose C Corp if you want to grow your business and raise capital from various sources.
One of the main advantages of a C corporation is that it can have unlimited shareholders, both domestic and foreign, and multiple classes of stock with different voting and dividend rights. This gives you more flexibility and options when raising capital from various sources, such as venture capitalists, angel investors, crowdfunding platforms, or public offerings. A C corporation can also offer more incentives to investors, such as preferred stock, convertible debt, or warrants.
2. Choose S Corp if you want to avoid double taxation and lower your overall tax liability.
One of the main advantages of an S corporation is that it can avoid double taxation by passing through its profits and losses to its shareholders, who report them on their personal income tax returns. This can lower your overall tax liability if your personal tax rate is lower than the corporate tax rate. An S corporation can also take advantage of some tax deductions that are not available to a C corporation, such as the 20% deduction for qualified business income under Section 199A.
3. Choose C Corp if you want to offer more employee benefits and attract talent.
Another advantage of a C corporation is that it can offer more tax-deductible benefits to its employees, such as health insurance, retirement plans, stock options, and fringe benefits. These benefits can help you attract and retain talent in a competitive market. A C corporation can also deduct the cost of benefits provided to all employees, regardless of their ownership stake.
4. Choose S Corp if you want to simplify your accounting and reporting requirements.
Another advantage of an S corporation is that it can simplify your accounting and reporting requirements by filing only one tax return with the IRS. A C corporation, on the other hand, has to file a separate corporate tax return and issue K-1 forms to its shareholders, which can increase your administrative costs and complexity. An S corporation also does not have to pay estimated taxes or alternative minimum tax, which can reduce your tax burden.
5. Choose C Corp if you want to protect your personal assets from business liabilities.
Another advantage of a C corporation is that it is a separate legal entity from its owners, who are called shareholders. This means that shareholders are not personally liable for the debts or obligations of the corporation, unless they have personally guaranteed them or committed fraud. This can protect your personal assets from business liabilities, such as lawsuits, creditors, or bankruptcy.
6. Choose S Corp if you want to avoid double taxation when selling your business.
Another advantage of an S corporation is that it can avoid double taxation when selling your business. If you sell your C corporation, you will have to pay taxes twice: once at the corporate level when the corporation sells its assets, and once at the personal level when you receive the proceeds from the sale of your shares. However, if you sell your S corporation, you will only have to pay taxes once at the personal level, since the corporation does not pay taxes on its income.
7. Choose C Corp or S Corp based on your future plans and goals.
Finally, you should choose a C corporation or an S corporation based on your future plans and goals for your business. For example, if you plan to expand your business internationally, a C corporation may be more suitable, since it can have foreign shareholders and subsidiaries. If you plan to keep your business small and family-owned, an S corporation may be more suitable, since it can avoid double taxation and simplify your accounting.
C Corp vs S Corp: A Statistical Comparison
C corp and S corp are two different types of corporations for tax purposes. Both have shareholders, directors, and officers, and follow the same corporate formalities and obligations. The main difference is that a C corp is taxed on its income and distributions, while an S corp is only taxed on its distributions. An S corp is a pass-through entity that reports its profits on the owners’ personal taxes, and has restrictions on ownership. A C corp has no restrictions on ownership and can raise money from investors more easily. C corp is the default tax status for corporations, but some can elect S corp status instead. LLCs can also choose to be taxed as C corps or S corps.
Global Demand for C Corp and S Corp
According to the IRS statistics, there were **1.6 million** C corps and **4.2 million** S corps in 2018, the latest year for which data is available. The number of C corps has been declining steadily since 1986, when it reached a peak of **2.6 million**. The number of S corps has been increasing steadily since 1986, when it was only **0.8 million**. The trend reflects the preference of many business owners to avoid the double taxation of C corps and take advantage of the pass-through taxation of S corps. However, some businesses may still choose to be C corps because of the benefits of unlimited ownership, easier access to capital, and lower tax rates for retained earnings.
References:
http://corp.delaware.gov/Aug09feesch.pdf
https://www.irs.gov/pub/irs-pdf/i1120.pdf
https://www.nerdwallet.com/article/small-business/s-corp-vs-c-corp
https://www.irs.gov/statistics/soi-tax-stats-integrated-business-data
https://corporatefinanceinstitute.com/resources/management/c-corp-vs-s-corp/
https://www.forbes.com/advisor/business/c-corp-vs-s-corp/
https://www.wallstreetmojo.com/c-corp-vs-s-corp/
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