Making the decision to remain a C Corp or change your corporation's status to an S Corp doesn't have to be confusing!
Congratulations! You've been paying close attention to this series (and hopefully reached out to us for advisement) and you've decided that incorporating your business is the right move for your situation. Great job, but you may still have one decision left...S Corp or C Corp. Not sure? Don't worry, we've got you!
While the fundamental pros and cons of having a corporation applies to both S and C Corps, there are some nuances that may make one more beneficial to you than the other.
What is an C Corp?
It's important to note that all corporations are initially considered C Corps. Some characteristics of a C Corp include:
Unrestricted Ownership: There are no limits placed on classes of stock, the number of shareholders, or the country of residence for those shareholders. So, you can expand your investor pool internationally.
Double Taxation: C Corps are not considered pass through entities. This means that both corporate and personal taxes must be filed and paid on the revenue created by the corporation.
Lower Tax Rate: While C Corps are subject to double taxations, they are also granted a lower maximum tax rate than other structures, including S Corps.
Did You Know: S-corps and C-Corps get their names from the subchapter of the IRS tax code from which they are taxed.
What is an S Corp?
Transitioning your corporation into an S Corp requires an additional election by the board of the company to transform the business into a S Corp. Some other characteristics of an S Corp include:
Limited Ownership Options: S Corps are limited in the type and amount of stock they can issue as well as who can become share holders. The corporation can only issue a maximum of 100 shares of stock in a single class and the shareholders must reside within the US.
No Public Trading: Due to the ownership restrictions, being an S Corp makes taking your corporation public impossible. So if you're dreaming of appearing on the New York Stock Exchange, S Corp is not the structure for you.
Tax Benefits: In addition to not being taxed on a corporate level (making it a pass-through entity), S Corps can pass along losses, and the give up to a 20% reduction in net qualified business income all of which can help lower shareholders' tax liability.
Which benefit is most important to you when starting a corporation
Single Taxation (S Corp)
Lower Tax Rate (C Corp)
Keeping if Private (S Corp)
Unrestricted Ownership (C Corp)
C Corp vs S Corp: The Final Battle
Now that you know a bit about both structures, which one one is best? Unfortunately, there is no clear cut answer to this question. For companies who plan to grow and eventually become traded publicly or expand into international markets being a C Corp makes sense. However, if you plan on continuing as a small or family owned corporation and just want the security that incorporating provides then moving forward with an S Corp election may work for you.
It is also important to keep in mind that transitioning between the two options does not have to be a permanent decision. However, transitioning from a C Corp to an S Corp after establishing foreign shareholders, multiple stock classes or going public can take a great deal more restructuring. While transitioning from an S Corp to a C Corp is going to be a bit smoother process.
How To Get Started
If you're still unsure which is right for you or how to make the transition, reach out to us. Schedule a business growth consultation with us so we can help you choose the perfect structure for your business. Click the button below to get started.
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