Form a Corporation

Limited Liability: One of the primary advantages of a C-Corp is that it provides limited liability protection to its shareholders. This means that the owners (shareholders) are typically not personally responsible for the corporation’s debts or legal liabilities. Their liability is generally limited to the amount they’ve invested in the company.

Separate Legal Entity: A C-Corp exists as a separate legal entity from its owners/shareholders. This separation means that the corporation can enter into contracts, incur debts, and engage in legal actions in its own name.

Ownership and Structure: C-Corps have shareholders, directors, and officers. Shareholders are the owners of the corporation and can receive profits through dividends. Directors are elected by shareholders and make high-level decisions for the corporation. Officers (such as CEO, CFO, etc.) manage the day-to-day operations.

Taxation: C-Corporations are subject to corporate income tax on their profits. Unlike pass-through entities (such as sole proprietorships, partnerships, or S-Corporations), C-Corps face double taxation. This means the corporation pays taxes on its profits, and when dividends are distributed to shareholders, they are taxed on those dividends as well.

Raising Capital: C-Corps have the advantage of being able to raise capital more easily through the sale of stock. They can issue different classes of stock, which can attract investors looking for various levels of risk and reward.

Complexity and Compliance: C-Corporations typically have more administrative and regulatory requirements compared to other business structures. They are required to hold regular meetings, keep records, file annual reports, and comply with various state and federal regulations.

Potential for Growth: C-Corporations are often favored by businesses with plans for substantial growth, seeking venture capital funding, or planning to go public through an initial public offering (IPO).

Pass-Through Taxation: One of the primary advantages of an S-Corp is its pass-through taxation. Similar to partnerships and sole proprietorships, S-Corps do not pay federal income taxes at the corporate level. Instead, profits and losses “pass through” the corporation and are reported on the shareholders’ personal tax returns. This helps avoid the double taxation faced by C-Corporations.

Limited Liability: Like C-Corps, S-Corps offer limited liability protection to their shareholders. Shareholders are generally not personally liable for the company’s debts and obligations.

Ownership and Structure: S-Corps have shareholders, directors, and officers, similar to C-Corporations. However, S-Corps have certain restrictions on ownership. They cannot have more than 100 shareholders, and shareholders must be U.S. citizens or residents.

Formation and Requirements: To become an S-Corporation, a business must first be formed as a standard corporation (C-Corp) and then elect S-Corp status by filing Form 2553 with the IRS. S-Corps have fewer administrative requirements compared to C-Corps, but they must still hold regular meetings, keep records, and comply with state and federal regulations.

Capital and Stock Classes: S-Corps can only have one class of stock, which means they cannot issue different types of shares as C-Corps can. This limitation simplifies the structure but might be restrictive for businesses seeking various investment options.

Distributions and Compensation: In an S-Corp, shareholders who also work for the company must receive reasonable compensation. The remaining profits can be distributed as dividends, which are not subject to self-employment taxes, unlike the salary portion.

Ideal for Small Businesses: S-Corps are often favored by small to mid-sized businesses due to their tax advantages and the flexibility they offer in terms of ownership and management.