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Have you decided which business legal entity is best for your company? Some options include C and S corporations, limited liability companies (LLCs), and sole-proprietorships. Let’s dive deeper into C corporations.
This filing status is particularly appealing for companies looking to grow and raise more capital. While C corporations offer benefits for growing businesses, there are tax ramifications to know about, too, which is a key differentiator when compared to S corporations.
One of the main reasons a business would file as a corporation (C or S) or LLC has to do with liability. Owners and shareholders of these types of businesses are not held personally liable for any business losses or risks. This means their personal assets are not at risk.
One of the main differences between C corporations and S corporations involves ownership. C corporations have no limit on the number of shareholders, while S corporations are limited to 100. That’s why growing businesses might prefer C corporation status since there’s no limit on their ability to raise capital.
Regardless of whether you file as a C or S corporation, the business is owned by the shareholders, who elect a board of directors to make business decisions and oversee policies. Then, you must hold annual shareholder and board of directors meetings, recording the proper minutes.
Shareholders of a C corporation can be from outside of the United States. S corporation shareholders must be individuals who reside in or are citizens of the United States.
Note: S corporations can later file as a C corporation, which might appeal to some companies as they require additional capital.
Another critical difference between C corporations and S corporations is how they are taxed. All profits of a C corporation are taxed at the corporate level, but if some profits are paid as dividends to shareholders, those are taxed at the personal income tax level. This is considered double taxation. However, this can be avoided if profits are reinvested back into the business. This is in accordance with subchapter C of the Internal Revenue Code, hence the name “C corporations.”
S corporations — taxed under subchapter S of the Internal Revenue Code — don’t face the possibility of double taxation because their profits are taxed on a “pass-through” basis, meaning profits pass through owners and shareholders’ personal income tax. LLCs are taxed on a “pass-through” basis, too.
All corporations are required to file articles of incorporation with the appropriate secretary or department of state where the business resides. This article of incorporation — or certificate of incorporation — outlines the necessary information on the business, making it public record. These documents include your company name, business purpose, and other important information. The cost to file these articles of incorporation varies depending on the state in which the company resides.
Other costs include government filing fees, attorney fees, and — in some states — a franchise tax.
We are committed to helping your business reach its potential. Our dedicated business banking professionals can help you find the right product to meet your business’ needs. To learn more, please call 1-800-428-7463, visit us online, or visit your nearest Citizens Bank branch.
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