S corporations and C corporations each have advantages and disadvantages. Their suitability depends on your individual needs. Choosing the right one for you depends on what type of business you own, and how much profit the business produces.
If your corporation turns out more money that can be considered higher than the reasonable salary for you as a president or CEO of the company, then obtaining an S corporation tax status might be the right choice. This is because an S corporation passes profits directly to the owner, which means corporate tax is not assessed on the business. The profits can be filed in the owner’s personal income tax. In a C corporation, your profits will be doubly taxed. As the owner of the company, you will have to pay corporate tax, as well as an individual income tax on your profits.
If you plan on opening a small business with investors, and anticipate losing money for the first few years, an S corporation status would be more beneficial for you. Business losses can be filed in the investors’ personal income tax to offset any other potential income they may have.
If you plan to expand your business and give your employees stock options, obtaining a C corporation status would be more advantageous. S corporations are limited to having less than 100 shareholders. So, if you plan to have more than that, achieving a C corporation status is the right move.
Another reason why you may want to choose a C corporation tax status over an S corporation status is that there are rules the IRS impose that force you to become a regular corporation. For example, if you plan on using small corporate offering registration to raise funds for your corporation, then you will need to apply for a C corporation status. If you plan to make your corporation public, you will need to become a C corporation.
If you are planning to start a business, make sure you consult with a business lawyer, and check federal and state laws governing corporation status. They will be able to advise you as to what would be more beneficial for you.
S Corporations provides detailed information on S Corporations, S Corporations versus C Corporations, S Corporation Forms, S Corporation Advantages and more. S Corporations is affiliated with Limited Liability Corporation Definition.
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