For some businesses, an LLC is the best structure. These businesses tend to be small to medium sized and have decided that they won’t want to go public and offer stocks. But if you’ve decided that an LLC is not right for you, how do you decided between the two types of corporation? In other words, should you incorporate as an S-Corp or a C-Corp?
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In the end, C-Corps and S-Corps are more alike than they are different. The following traits are common to both C-Corps and S-Corps:
- Liability Protection: Shareholders in both C-Corps and S-Corps are generally not responsible for business debts or business liability. Liability protection can be sacrificed if the company does not remain compliant, however
- Corporate Structure: Unlike LLCs, corporations must have a structure that breaks down into shareholders, directors and officers.
- Shareholders own the company. They elect the board of directors
- Directors oversee larger issues, such as corporate goals, affairs, and decision-making. They elect officers
- Officers deal with day-to-day business affairs.
- Corporate Documents and Compliance: Both C-Corps and S-Corps need to file certain documents with the governing entity in their state. Typically, these are the Articles of Incorporation. Furthermore, corporations have obligations such as issueing stock, paying fees, adopting and enacting bylaws, and holding shareholder and director meetings (as well taking meeting minutes at these meetings).
The main differences between an S-Corp and a C-Corp fall into three categories: ownership, shareholder rights, and taxation.
- Ownership: C-Corps allow unlimited amounts of shareholders and thus are a great choice for larger businesses. S-Corps may have no more than 100 shareholders and these shareholders must all residents of citizens of the United States. Furthermore, while C-Corps can be owned by other corporations, LLCs, or even trusts, S-Corps cannot.
- Shareholder Rights: When forming a C-Corp, you can choose to have several different strata of shareholders, ones whose votes count for more or less than other members. Typically, early owners or founders have a more sizable say in voting, and thus, the operation of the business. S-Corps, on the other hand, have just a single type of shareholder. As such, it can be easier for C-Corps to expand, and sell shares, as additional flexibility is a solid advantage.
- Taxation: First off, for either entity, personal income tax is paid on dividends salary drawn from the company. That said, C-Corps also pay taxes at the corporate level, while S-Corps, like LLCs, are pass-through entities. What’s all this mean? That C-Corps have a possibility of double-taxation. In a C-Corp, corporate income is taxed at the corporate level, and dividends are taxed at a personal level.
As we mentioned above, C-Corps and S-Corps are more similar than different. C-Corps have more flexibility for shareholder rights and ownership but face tax implications for this privilege. In general, larger companies opt for forming as a C-Corp, where small to medium sized businesses often choose incorporating as an S-Corp.
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This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.