Business Lawyer

When you incorporate your company, you form a completely new business entity that is distinct from you. If the company incurs debt or causes an injury, it is the corporation that is liable. This protects your personal assets.

There are two different types of corporations: C corporations and S corporations. They are similar in many respects, and both provide you with limited liability. You can learn more about these distinctions from a business lawyer such as one from Kaplan Law Practice, LLC. However, there are some fundamental differences between the two of them that you should understand before you decide which type is better for your business. 

Ownership

There are no limits on the number of owners a C corporation can have. You can start a C corp and be the only owner and shareholder. There is also no maximum number of owners allowed. While there isn’t a minimum on the number of owners an S corporation can have, there is a maximum. As with a C corp, you can start and run an S corporation by yourself. However, an S corporation is limited to 100 owners tops. They must all be shareholders, and an S corp can only sell one class of stock. Additionally, to be a shareholder in an S corporation, you must be a citizen of the United States. There is no such requirement for a C corporation. 

Taxation

One of the biggest differences between a C corporation and an S corporation is that the former has to pay corporate tax, while the latter does not. If you are a shareholder in a C corporation, this results in double taxation. You have to pay corporate income tax on behalf of the company, and then you must pay personal income tax on any profit that you received from it. Shareholders in an S corporation do not have to pay corporate tax. Instead, they report their income and losses related to the business on a personal tax return. This is called pass-through taxation, and it avoids the double penalty that C corp shareholders face.

Formation

A new corporation is a C corporation by default. If you want to remain a C corp, you can stop the formation process right there. However, if you prefer that your corporation become an S corp, you need to take at least one extra step. You can convert your C corp into an S corp by filling out Form 2553 with the Internal Revenue Service. Depending on where you live, you may also have to file state tax forms. A business lawyer can provide more information regarding these steps. 

C corporations and S corporations each have their own strengths and weaknesses, and neither is inherently better than the other. One of our attorneys can help you explore your options and make sure your start-up is in compliance with applicable laws.