When you are starting a corporation, two of the main types of corporations you'll want to choose from are C corporations and S corporations. If you're not sure which type of corporation you should form, it's best to turn to a corporate law firm for help.
Both S corporations and C corporations will provide you with limited liability protection. You will not be held personally liable for your business's debts and obligations. Your corporation is considered a separate legal entity that is created by filing documents with the state. Your corporation will have directors, officers, and shareholders. There are also various internal and external formalities that you are expected to follow.
C Corporation Ownership
The C corporation is considered to be the default type of corporation.
C Corporation Taxes
A C corporation is a separate taxable entity. You may have to pay double taxes if you have income distributed to you in the form of a dividend. However, you will be able to save money through a 20% qualified business tax deduction.
S Corporation Ownership
The S corporation cannot be owned by a C corporation, an LLC, a partnership, or a trust. They also cannot be owned by other S corporations except under certain circumstances. If you are considering filing as an S corporation, you'll need to file an IRS form 2553. Because an S corporation cannot be owned by more than 100 shareholders, it cannot go public. This means that there are more limitations to how an S corporation can raise funds. However, if you do not need to go public and would like to save money on your taxes, an S corporation may make more sense.
S Corporation Taxes
An S corporation provides some tax savings because you are not required to pay a self-employment tax. Profits and losses are passed through to your own personal tax returns.
If you intend to have a foreigner own your company, you will need to use a C corporation. Multinational corporations cannot be S corporations because the ownership of S corporations is limited to US citizens.
If you are still not sure what type of corporation you would like to form, make sure to speak with a corporate law firm. Not only will your decisions affect your business expenses, but the wrong decisions may also lead to civil or criminal penalties. A corporate lawyer can help you make the right choices.