An S Corporation is a business that passes the income through individual shareholders who will then divide the losses or profits. And for that reason, the federal tax will come in the form of individual taxes instead of the business being taxed as a whole. This will, therefore, make it a tad easier for the business to minimize taxes that would have otherwise interfered with the cash flow of the business.
A C Corporation, on the other hand, is different than an S Corporation as the taxes are exempted from their owners as they are recognized by federal law as completely separate entities. This simply means that the C Corporation, in as much as it does enjoy limited liability, is still subject to income taxation. Most non-profit organizations fall under the C Corporation banner.
The only non-profit organizations that are classified as S Corporations are those that make a formal request to be treated as an S Corporation, which has to be formalized. That said, when it comes to the C Corp vs S Corp, which one should businesses go for?
What to Consider Before Making a Choice on Business Structure
Once you’ve formed your business, whether as a corporation an LLC, or a partnership, your first order of business will be deciding the most efficient business structure. And that’s exactly where you’ll need to get your facts right. Between an S Corporation and C Corporation, which one will end up being the best structure for your business? This is a question that has been on the minds of so many business proprietors.
That said, your first order of business should be looking at the features as well as the benefits of both the C Corp as well as the S Corp. Check out the number of shareholders that you have, their places of residence, their preferences and so on. In other words, these bits of information will go a long way in helping make a sound decision.
For instance, you might want your business to be an S Corporation because it has owners who prefer paying personal income tax on the profits made by the business. S Corporations might also be a great idea if all of the shareholders are permanent residents of the United States of America or are resident aliens.
The S Corporation is also a good idea when your business has got less than 100 shareholders which are actually stipulated by the law. Also, the law states that whether your business suffers a loss or a profit, the tax will be passed to the owners after every financial year. The C Corporation, on the other hand, doesn’t need a lot of criterion as its S Corporation counterpart.
In order for your business to be registered with the IRS as a C designation, you, as well as the other owners, will have to be comfortable with paying personal income tax on the profits. The business must also pay corporate income tax after the stipulated period of time.
So whether the shareholders are US citizens or not, or if you have more than 100 shareholders or not, everything will still work out perfectly. The good news is that once you’ve officially started your LLC or corporation, you’ll have up 75 days to decide what you are going for.
Then you can make a choice whether to go the S Corp way or the C Corp way. Remember, neither of them is better than the other. It just all depends on what you want.
So feel free to use that time to contact any tax specialists or attorneys for sound advice. They will give you all the help you need based on the facts you present to them and, in the end, help you make the much-needed decision that will serve you and your business well.
Besides the C Corp and S Corp, there are also other things you need to know You’ll have to educate yourself on how taxes impact your business. It's always best to find a professional with that kind of knowledge to help you out.