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S-Corp vs C-Corp (Discover Which is Better For YOU)

S Corp vs C Corp

So you want to start a corporation?

There are around 9 million corporations of different types in the US. Not all of them are necessarily members of the Fortune 500.

You have a lot of reasons to open a corporation in the US, including:

  • Raise large amounts of money through shares and bonds.
  • Protect your personal assets through corporate liability.
  • Easily able to transfer ownership (or portions of ownership) to another person.

But if you want to start a US business you need to decide between the S-Corporation and the C-Corporation. I can help you make that decision.

This guide is going to show you the main points in the S-Corp vs. C-Corp discussion. Then you should contact me at sam@mollaeilaw.com to get help with making that decision.

I can assess your business and advise you on the right type of corporation for you.

But for now, here’s my S-Corp vs. C-Corp guide so you can make a more informed decision.

 

What is an S-Corp?

An S-Corp is a type of corporation that’s formed through a tax elective with the IRS. It’s the most common type of corporation in the US, making up 61% of the corporations in the US.

The S-Corp is nothing more than a variation of the C-Corp.

The structure of the corporation is just the same as the C-Corp.  The shareholders are the people who own the company and make all the major decisions.

They also share in the profits of the business. And they can determine the future direction of the company.

Your S-Corp also comes with protection against lawsuits. There is no personal responsibility involved, so if someone sues you only the assets of the corporation are at risk.

One of the major differences is that only US citizens can form an S-Corp. Foreigners may only form a C-Corp, and they can’t hold a leadership position in an S-Corp.

In short, there are more similarities than differences between the S-Corp and the C-Corp.

 

What is the C-Corp?

The C-Corp is the standard business entity for corporations. Whenever you form a corporation it will initially be a C-Corp until you decide to change it to something like an S-Corp.

As the most common type of corporation, the business is owned by its shareholders. Of course, there may only be one or two shareholders.

It comes with liability protection, so if you get sued only the corporation itself is liable, rather than the shareholders. This also applies to any business debts that have been taken out.

So, what does it take to set up a C-Corp?

You’ll nearly always need to file articles of incorporation as a minimum. It is also recommended that you write a partnership agreement to prevent disputes with other shareholders later.

There are also various compliance obligations you will have to take into account, but these are always going to vary depending on the state you are operating in.

 

S-Corp vs. C-Corp – How Ownership Differs

Both types of a corporation have similar ownership rules, but with the S-Corp you do have restrictions that you don’t have with the C-Corp.

The primary restriction you have is that an S-Corporation can only have 100 shareholders at any time. This is why you never see an S-Corp appear on the public stock exchange. It is not practical.

The C Corp can have thousands of shareholders. For companies that intend on raising substantial amounts of capital, the C-Corp is the only real option.
You also need to remember that an S-Corp can only have US citizens as their shareholders because it’s an IRS tax elective.

C-Corps can have as many non-resident shareholders as they want. In some cases, the entirety of a C-Corp’s holding may be held by non-US citizens.

When you look at the S-Corp vs. C-Corp debate in this way you can see that any corporation that wants to deal internationally will always choose the C-Corp option.

But it all depends on what you want to accomplish.

Therefore, you should get in touch with me at sam@mollaeilaw.com for help on making this tough decision.

 

S-Corp vs. C-Corp – The Rights of Shareholders

Shareholders are the owners of the company and with an S-Corp there is just a single class of share, whereas with the C-Corp you can have as many levels as you want.
What does this mean in practice?

It means that anyone who owns shares in an S-Corp has the same rights as everyone else. This can produce less flexibility.

C-Corps work in a different way with regards to what owning shares entitles you to.

You can own shares in a C-Corp but not have the right to vote, to sit on the board of directors, or to make decisions within the company. This is because there are lots of different share types.

Let’s use an example to explain this in practice:

When you invest in a publicly-traded company you own a piece of that company. But if you own shares in Apple you don’t get to have any input regarding the direction of the company.
That is because the shares you buy on the market don’t entitle you to that.

However, there may be other rules with C-Corps. For example, if you own a certain percentage of the total shares within the company you may gain a position on the board of directors that way.

But different share types protect companies against this, so it is more difficult for individual shareholders to initiate a takeover of the company.

Another way this may be used is through a public offering of shares. The founders of the company want to maintain their positions, so they create a class of share just for them.

This class could outweigh the voting rights of all other shares, thus keeping them in power no matter how many new shareholders come on board.
Which is the best option, though?

That depends on the ambitions of the company. A corporation that one day wants to go public will use a C-Corp to protect the holdings of the founders and to have more control over new shareholders.

But if you intend on sticking to the small business format an S-Corp’s voting rights won’t have too much of an impact in the future.

 

S-Corp vs. C-Corp: Tax Advantages

The difference between a partnership and a corporation often centers on the tax differences. A C-Corp is a separate taxable entity by the IRS.
Why is that so important?
It changes at what level you will be taxed on your earnings.

The C-Corp is taxed at the corporate level and they have to file a corporate tax return, which is what you would expect. But what you may not know is that the money paid to its shareholders can be taxed again at the personal income tax level.

There are ways of limiting this form of double taxation, but the point is that it exists, and it may make entrepreneurs wary of taking money out of the company at all.

Sometimes it is even profitable to distribute and accept double taxation, though. Remember that distributing to shareholders reduces the net income of the corporation.

It is a balancing act that requires an accountant to work out. And it also depends on the state you live in.

So how does an S-Corp differ?

An S-Corp is not considered to be a separate taxable entity by the IRS. That is why this form of corporation is considered to be a tax elective because you are electing to be taxed at the personal income tax level instead.

Any distributions you receive from the company and any income the business makes is reported as part of your personal income tax return.

This means S-Corp entrepreneurs aren’t subject to corporate taxes.
S-Corps are subject to the pass-through tax for this reason.
But does that always make an S-Corp better?

Not necessarily. Remember that it always depends on your situation, which is why we are having this debate in the first place.

A C-Corp may be taxed at two levels, but if an entrepreneur owns multiple businesses a C-Corp is a useful entity for lowering their tax bill.

Let’s say Entrepreneur A already owns an S-Corp and wants to start another unrelated business.
They are already receiving a significant income from their S-Corp. If they started another S-Corp they would receive an income from two businesses, which could potentially push them into a higher tax bracket.

But instead, Entrepreneur A decides to start a C-Corp. They don’t take any distributions from the company, so the money is only taxed at the corporate level and it is not lumped together with his other income.

This lowers his overall tax bill.
And there are lots of different vehicles that he could establish to lower his tax bill even more.
As you can see, your personal circumstances dictate which corporation is better for you.

I recommend getting in contact with me at sam@mollaeilaw.com so I can assess your business and give you some expert advice on the right type of corporation for you.

S-Corp vs. C-Corp – Which is Better for You?

It depends is the short answer.

First, you need to consider your ambitions. Big ambitions mean that it is probably better to use a C-Corp because it allows you to operate with a minimal number of shareholder restrictions.
It is also useful for making sure that you preserve your influence within the company. The C-Corp is your classic corporation at the big business level.

But not all my clients want to establish a corporation in the US with the intention of becoming as big as Apple. It’s not for everyone.

Many of my clients are better served to start an S-Corp because they avoid double taxation and they don’t have to deal with the same formalities as C-Corp owners.

So how do you make the decision?

I advise you to consider what is most important to you.

Tax Advantages – I always recommend the S-Corp if you are looking to pay less tax with a minimal amount of hassle. The only exception is if you own multiple companies and you don’t want everything taxed at your personal income level.

Raise More Capital – The C-Corp is the best option for raising as much capital as possible. You can have as many shareholders as you like, and they can come from all over the world.

Preserve Influence – S-Corp shareholders all have the same voting rights, so if you bring in too many shareholders you can soon find that you are not running your own company any longer. You can be voted down; therefore, a C-Corp and its different share classes can prevent this.

The simplicity of Administration – The S-Corp is easier to administer than the C-Corp is the C-Corp is its own taxable entity and comes with additional responsibilities and obligations.

Where are you from? – To put it simply, if you are a US citizen you can choose between both. Non-US citizens don’t even have the option of establishing an S-Corp or being a shareholder of one.

These are the five issues you need to rank according to what matters to you in a company. Everyone’s needs are going to differ.

This may seem incredibly overwhelming to have to deal with, so get in touch with me at sam@mollaeilaw.com. I’ll help you make sense of it all and come to an informed decision.

 

What To Do Next

This may seem like a difficult decision because there is no right or wrong answer. It always revolves around your personal circumstances.

I can guide you through this decision-making process and help you understand the implications of making each decision. Don’t decide before you know all the facts because it’s hard to change your mind when you have already established your company.

I’ll make the process easy by giving you all the facts you need to make an informed decision on this matter.

All you need to do is email me at sam@mollaeilaw.com.

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

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