Most businesspeople prefer the protection of a corporation as opposed to a sole proprietorship or partnership. Corporations are a good choice because your personal assets are protected against any liabilities incurred by your business. The two types of corporations you can choose as a business entity are a C-Corp or an S-Corp.
You would lean toward an S-Corp entity if you desire a traditional management model with a limited amount of shareholders. S-Corps have established precedent with the IRS and through the courts. Shareholders and investors are attracted to S-Corps because the law allows a tax flow wherein they can use start up losses to offset tax liability from other income. Setting up an S- Corp will cost you $100 to $400 depending on your locale.
An S-Corp is limited to 75 shareholders. These shareholders have to be United States citizens or resident aliens. S-Corps do not have multiple classes of shares. Also, a percentage of the corporate income must be paid toward Social Security and Medicare taxes in an S-Corp.
You would lean toward a C-Corp entity if your business deals in capital gains and many shareholders. Venture capitalists like C-Corps because there is a preferred stock option. Investors also like this entity because of merger, liquidation, and dividend options. There is also the option to switch from preferred to common stock, in an effort to grow the company. Conversion of an S-Corp to a C-Corp is easy, as well.
A great disadvantage to C-Corp entities is that there is double taxation on profit. This works through taxing corporate gains and then taxing, again, at the shareholder level. If you, as the owner, invest capital into your corporation, you might be exempt from the double tax. There are no FICA regulations applicable to C-Corp employees.
Anyone in business should have a good financial plan in place. When adopting this plan, you need to consider if a C-Corp or an S-Corp represents the best business entity for your interests. There are advantages and drawbacks to both, with the liability issues making them the best choice over sole proprietorships or partnerships.
If you are in business, or planning to be, you need to seek out an experienced financial planner and tax attorney. These consultants will help you to arrive at decisions concerning your business entity and tax strategies that will aid you and your enterprise in moving forward.
When you start your own business, the decision to determine it’s legal entity is very important. It has long-term consequences on your profit making capacity as well as tax liability. Are you looking out for some valuable tips? Here are some of them explained by Chintamani Abhyankar.