C Corporation
By law, a corporation is considered a legal entity that is separate and apart from the owners. Corporations are chartered in the states in which they are headquartered. Corporations can be taxed and sued. Corporations also frequently enter into contractual agreements. Owners of corporations are called shareholders. The shareholders elect a group who oversees the major policies and decisions. This group is called the board of directors. The corporation has its own life; therefore, changes in ownership will not dissolve the corporation.
Advantages of a C Corporation
- Shareholders have limited liability. If the corporation is sued, usually shareholders cannot be held liable for the acts, debts, and liabilities of the corporation.
- Shareholders are generally accountable for their investment in the corporation. This does not mean that officers cannot be held accountable for their own actions.
- Corporations can raise money by selling the company’s stock.
- The benefits provided to officers and employees may be deducted by the corporation.
- There are times when a regular corporation, also known as C-corporation, can adopt an S-corporation status if certain requirements have been met. This allows for taxation similar to that of a partnership
- It is much easier to exit one’s investment in a corporation, since shares are easily transferable and can be sold without affecting the business of a corporation. This is primarily due to the separation between ownership and management imposed by the corporate form of organization.
Disadvantages of a C Corporation
- The extensive time and money involved in incorporating the organization.
- The corporation requires more paperwork in order to comply with the regulations of the federal, state, and local agencies.
- Incorporation may cause higher overall taxes.
- Shareholder dividends are not deductible from the business income leaving it to be taxed twice.
- In certain circumstances, shareholders can be held liable for the corporation’s acts, debts, and liabilities. The additional layer of formality needed to prevent this liability can make the operation of your business as a corporation more costly than it would be as another kind of entity.
- A significant disadvantage to conducting business as a corporation is the double taxation imposed by the corporate income tax. Taxes have to be paid on the corporation’s income and on the money transferred out to shareholders on their personal tax return.
S Corporation
Another type of corporation is the S-corporation. The unique thing about an S-corporation is that it is a tax election only. Basically, the shareholder is able to treat the earnings and profits as distributions and pass it directly to his personal tax return. The key with this corporation is that shareholder may work for the company. If so, the shareholder must pay himself wages if there is a profit, but the wages has to be reasonable compensation. If the shareholder does not take this action, it may pose problems with the IRS like earnings and profits being consider wages and then being liable for the payroll taxes on the entire amount.
Advantages of an S Corporation
- There is limited liability for business debt.
- Each owners share of corporate profit or loss and be reported on personal tax returns.
- The owners are allowed to use corporate loss to offset income from other sources.
Disadvantages of an S Corporation
- S-corporations require more money to create than a sole proprietorship or partnership.
- Limited Liability Companies offer some of the similar advantages as an S-corporation; however, S-corporations have more paperwork.
- The income has to be allocated among the owners based on each individual’s ownership interest.
