Thinking about becoming a freelance gig worker? Ready to start a business? If so, you would be wise to think carefully about how you want to operate. While there are many different options to choose from, this article will focus on two: the a C-corporation (commonly, the “C Corp”) and the S-corporation (commonly, the “S Corp”). If you are having trouble determining which type of corporation to select, then take the time to read this article, as we highlight some of the key differences between the two.
The three main components and differences between the two forms of corporations are formation, ownership, and taxation. Each of the three have their advantages and disadvantages. However, do not read this article as us promoting one form of incorporation over the other. Rather, view the advantages and disadvantages as if they were for your own company.
C Corp Formation
Filing for a C Corp is extremely simple. All you have to do is file a document with your state, the “Articles of Incorporation”. The paperwork is minimal and easy to fill out.
S Corp Formation
Similarly, filing an S Corp requires the filing of an articles of incorporation. In addition, you will also have to file an IRS Form 2553. In order to be an S Corp, you must file this with the IRS.
C Corp Ownership
Ownership is very straight-forward under a C Corp. There are no restrictions on ownership and thus an unlimited number of shareholders can invest in a C Corp. Moreover, anyone can own part of the company, including individuals, corporations, other C Corps, and other S Corps. If you are looking to create a big company with major funding, and a plethora of shareholders, a C Corp is for you.
S Corp Ownership
Alternatively, if you are looking to create a smaller business, an S Corp may be better suited for your business. First off, all investors must be U.S. citizens. Compared to a C Corp where there can be an unlimited number of shareholders and various classes of stocks, here the cap is at 100 shareholders and there may be only one class of stock. Finally, unlike a C Corp, shareholders cannot include other C Corps or S Corps. Thus, while these are disadvantages for a large business, small businesses could fit in these limits.
C Corp Taxation
All C Corps are taxed not once, but twice. When the company earns revenue they must report it on their corporation’s tax return. Beyond that, any after tax-profits are sent to the shareholders in the form of dividends. Those then must be reported on the shareholders personal tax returns. Thus, a C Corp holds a form of “double taxation”.
For those businesses that are just starting out, if all of your “profits” are consumed by salaries, including the salary of the founder, then there is no double taxation as there’s no profit left at the corporate level.
S Corp Taxation
Here is where the benefit we alluded to earlier comes to fruition for the S Corps. They are only taxed once. Business income only needs to be reported once on the individuals personal tax returns. For small businesses where revenue may not be as high compared to a big business, this provides much needed tax relief on accumulated income.
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We hope that this article has made your decision a little easier to decide how to form your business. If you are still undecided, JustLaw is here to help. We are just a click, call or chat away.