Incorporation (C-Corp & S-Corp)

Incorporation (C-Corp & S-Corp)

Find out if a C Corp or S Corp is right for your business.


C-Corporation

Main Guide: Starting a Business.

A corporation, commonly referred to as a C-Corporation, is a company or group of people authorized to act as a single entity and recognized as such in law. Legally, the corporation is a person. Most jurisdictions allow creation of a new corporation through registration with the government. Registered corporations are owned by shareholders whose liability in the corporation is limited to their investment. Shareholders rarely actively participate in the management of the corporation; instead, they elect or appoint a board of directors that control the corporation in a fiduciary role.

Taxes

Corporations pay federal, state, and local taxes. They must register with the IRS and state and local revenue agencies, and receive a Tax ID Number.

Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are subject to "double taxation" - first, when the company makes profit, and second when shareholders are taxed on the dividends they receive.

Pros:

  • Limited Liability. Shareholders are not responsible for business debts and actions taken by the corporation.
  • Sale of stock. Corporations can generate funds through the sale of stock, which gives them a distinct advantage.
  • Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of the corporation will only pay taxes on corporate profits that are paid to them in the form of salaries, bonuses, and dividends.
  • Hiring of potential employees. Corporate structure allows you to higher top quality talent because you can offer competitive benefits and open the door for partial ownership through stock options.

Cons:

  • Money & Time. Corporations are costly and time-consuming to both start and operate.
  • Double Taxation. Some corporations are taxed twice. First, when the company makes a profit and second when shareholders pay personal income tax on the dividends paid out to them.
  • Paperwork. Corporations are highly regulated by federal, state, and local agencies - which means lots of record-keeping and paperwork.

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When to incorporate

When to incorporate

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S-Corporation

S corporations are ordinary business corporations that have elected to pass the corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. Thus, income is taxed at the shareholder level rather than the corporate level. Firms that might traditionally been run as partnerships or sole proprietorships are often run as corporations with a small number of shareholders in order to take advantage of this corporate firm.

Qualifications for S Corporation status:

  • Corporation must be a liability entity (a domestic corporation which has elected to be taxed as a corporation;
  • Must have only one class of stock;
  • Must not have more than 100 shareholders;
    • Spouses are automatically treated as a single shareholder for S-Corporation purposes.
  • Shareholders must be U.S. citizens or residents, and must be natural persons. Generally, corporate shareholders and partnerships are generally excluded. However, certain trusts, estates, and tax-exempt corporations (ex: 501(c)(3) corporations) are permitted to be shareholders.
  • Profits and losses must be distributed to each shareholder proportionately to each one's interest in the business.

Incorporation Checklist

Free Download

If you're thinking of starting a corporation, we recommend using this free incorporation checklist. While your company's requirements will vary, depending on your industry and the location of your business, this list is a helpful starting point on a path to engaging with a qualified incorporation lawyer.

The checklist includes:

  • Corporate name
  • State of incorporation
  • Number of shares to be authorized
  • Board size / Directors
  • Officers to be appointed
  • Common stock to be issued upon incorporation