As your business expands, Incorporating your business can secure assets, present tax breaks, and attract investors. But forming a corporation takes more than filing articles of incorporation. The Internal Revenue Service (IRS) requires that corporations to choose one of two tax structures. The right choice isn’t always obvious when weighing an S corp vs. a C corp.
C corporation and S corporation designations are both strong choices. While they have some similarities, they also have some crucial differences. Before you make your decision, ensure you understand the pros and cons of each option. That way, you can rest assured you set up your corporation for success.
What is an S-Corp?
Pros of an S-Corp:
- Tax Benefits: Business owners do not have to pay federal taxes at the corporate level. Business owners don’t have to pay accumulated earnings tax.
- Employee income: Shareholders can work as employees and receive a salary.
- Transfer of Ownership: Shareholders can transfer their interest without tax consequences.
- Credibility: S-Corp status may help establish credibility with customers, clients, suppliers, or investors.
Cons of an S-Corp:
- IRS Scrutiny: The IRS scrutinizes how S-Corps pay their employees because they can disguise salaries as corporate distributions to avoid paying payroll taxes.
- Taxes on benefits: Most corporate benefits are taxable as compensation to employee shareholders who own more than 2%.
- Stock Restrictions: They can only have 100 shareholders and only one class of stock, although they can issue both voting and non-voting shares.
What is a C-Corp?
Pros of a C-Corp:
- Liability protection: This business structures limited liability and ensures that the business owners are not held personally responsible for business debts and/or lawsuits.
- Tax advantages: This type of business structure can deduct more tax expenses.
- Raising Funds: Due to the unlimited number of stakeholders this structure can hold, they will have an easier time raising money if needed.
Cons of a C-Corp:
- No Personal Write-Offs: Investors can’t write off business losses on their personal income taxes.
- Double Tax: This type of business structure ensures that the business is taxed separately from the business owners, which means that the business owners are taxed TWICE.
- C-Corps are subject to greater regulation than other business structures, incurring higher legal fees.
Should you have further questions regarding which is best for you, given your circumstances, you should speak with your CPA.