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In the early stages of business development, an important decision you’ll face is what business legal entity, or structure, is best for your company. There are a variety, but S and C corporations, limited liability companies (LLCs), and sole-proprietorships are among the most common.
S corporations are typically suited for smaller businesses that want the liability protection afforded to a corporation, but also want to limit the number of shareholders. There are also tax benefits when compared to C corporations.
S corporations, C corporations, and LLCs offer limited liability protections. This means owners and shareholders are not held personally liable for any business losses or risks, protecting their personal assets.
A key difference between S and C corporations involves shareholders. S corporations are limited to 100 shareholders, while C corporations can have an unlimited amount.
Both S and C corporations are owned by the shareholders, who elect a board of directors to make business decisions and oversee policies. Annual shareholder and board of directors meetings must be held, recording the proper minutes.
Additionally, shareholders of an S corporation must be individuals who either reside in or are citizens of the United States. C corporations have access to foreign shareholders.
Note: S corporations can later file as a C corporation, which might appeal to some companies as they require additional capital.
Another notable difference between S and C corporations is how profits are taxed. All profits of an S corporation pass through to its owners and shareholders, which are then taxed at their personal income tax rate. Profits of an S corporation are not taxed at the corporate rate. This is in accordance with subchapter S of the Internal Revenue Code, which is where the name “S corporation” comes from.
C corporations, on the other hand, have their profits taxed at the corporate level and, if profits are paid in dividends to owners and shareholders, the personal income tax level, too. This is known as “double taxation.” This follows subchapter C of the Internal Revenue Code.
Like S corporations, LLCs are taxed on a “pass-through” basis.
Both S and C corporations are required to file articles of incorporation with the secretary or department of state where their business resides. This is also referred to as a certificate of incorporation and outlines some basic information about the business, such as company name, business purpose, and other important information that is made public.
Other charges to be aware of include government filing fees attorney fees, and a franchise tax, though not all states charge a franchise tax.
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