Do you know what designation is right for your business?

When it comes to business, the most common designation is the C corporation. But, this doesn’t necessarily mean it’s right for you.

To make the right choice for your business you must go deeper than that. That’s why we’ve outlined some of the key differences below.

Key Differences

There are three key differences between the S corporation and the C corporation. These three key differences are the tax liabilities, ownership, and shares.

Taxes

When it comes to a C corporation, income is taxed twice. That’s because the business will pay tax on its net income while shareholders pay income tax on anything they’ve earned.

This is notably different when it comes to an S-corp, as only the shareholders will be taxed. An S corporation essentially allows you to be taxed like a partnership or LLC. Meaning, profits earned at the corporate level are not subject to tax.

Ownership

C corporations have no limits on how many people can own shares. This differs compared to S corporations. S corporations are limited to 100 shareholders. Plus, every one of these shareholders must be a U.S. citizens or residents.

So, if your business requires more than one class of ownership or has shareholders that are not US citizens, a C corporation might be a better choice.

S Corporation Advantages

The big advantage of registering as an S corporation is its tax benefits. This is because S corporations don’t have to pay tax at the entity level.

Business owners can also lower their self-employment tax by characterizing money received from the business as salary or dividends. And, deductions for business expenses and wages can be claimed. Meaning, a lighter tax bill at the end of the year.

Shareholders can also be company employees, earn salaries, and receive dividends that are tax-free if the distribution does not exceed their stock base (if it does then it is taxed as capital gains).

However, if you decide to go with an S corporation, expect more scrutiny from the IRS. The IRS tends to look more closely at S corps because they can easily disguise salaries and corporate distributions to avoid payroll tax.

This means it’s vital all your books are in order and all paid salaries to shareholder-employees are reasonable. Otherwise, the IRS can revoke the S corporation designation.

C Corporation Advantages

C corporations are the most common. However, this designation does create a double taxation situation where it is subject to corporate and personal income tax.

Although this double taxation is seen as a deterred, there is the ability to reinvest profits in the company at a lower corporate tax rate.

They also legally separate the owner’s (or shareholders) assets and income from the corporation. This is seen as a benefit as it limits the liability of investors and owners. Meaning, the only real loss owners have is the amount they invested.

Another benefit to this designation is a large number of shareholders it has. This enables the corporation to obtain large amounts of capital which may not be possible with an S corp.

C corporations are also mandated to hold annual meetings. These meetings are held by a board of directors that are voted on by shareholders And, although they can have many owners and shareholders they are required to register with the Securities and Exchange Commission (SEC) when certain thresholds are reached. As well, a C corporation will continue to exist even if owners change or members are replaced.

Ultimately, if you’re unsure of which is right for you, consider speaking with one of our professionals today. Whether you’d be interested in learning more, or knowing what services would benefit you, give us a call at 407-328-5001.

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