If you are in the process of opening a new business, one of the first and most important decisions you need to make is whether to incorporate and, if so, whether to do so as an S-corporation or a C-corporation. The option you choose will determine your tax base, how you can source investment, and how you can grow your business in the future, so it is not a decision to be taken lightly. In order to make the right choice, you need a good understanding of what the differences between the two are.  To help you in that process, we’ve outlined the three major differences below.

• S-corporations and C-corporations are incorporated differently. When either an S-corporation or a C-corporation is formed, the articles of incorporation are filed with your state’s secretary of state, but for the corporation to be recognized as an S-corporation, you are required to file Form 2553 with the IRS. Both types of incorporation require a registered agent and corporate bylaws.
• S-corporations and C-corporations are taxed differently. The biggest difference between an S-corporation and a C-corporation is in how they each are taxed. C-corporations are taxed twice: first at the corporate level and then on the owners’ personal income tax returns if income is distributed to shareholders as dividends. By contrast, S-corporations are pass-through entities which means that the income is only reported on the owners’ or shareholders’ personal income tax return.
• S-corporations and C-corporations have different rules regarding ownership. C-corporations are able to sell ownership to anybody that they want to. That means that they can sell as many shares as they want and create different levels of ownership. By contrast, S-corporations are limited in their ability to expand ownership: there can’t be more than one hundred shareholders, all share types must be equal, and shareholders must be either U.S. citizens or resident aliens. This significantly restricts the ability of S-corporations to raise capital from investors.

There are other important differences between the two types of corporations, including the fact that an S-corporation can’t be owned by a C-corporation, another S-corporation or most other types of business entities, though C-corporations can be.

Before making this important decision, it is a good idea to consult with an experienced business attorney who can help guide you to the choice that will make the most sense in the short-term and the long term. To set up an appointment to discuss your particular situation, contact our office today.