Most entrepreneurs prefer the protection of a corporation rather than a sole proprietorship or partnership. Corporations are a good option because your personal assets are protected against any liability incurred by your business. The two types of corporations that you can choose as a business entity are C-Corp or S-Corp.
You would go for an S-Corp entity if you want a traditional management model with a limited number of shareholders. The S-Corps have set a precedent with the IRS and through the courts. Shareholders and investors are attracted to S-Corps because the law allows a tax stream in which they can use initial losses to offset the tax liability of other income. Setting up an S-Corp will cost you between $ 100 and $ 400 depending on your location.
An S-Corp is limited to 75 shareholders. These shareholders must be US citizens or resident aliens. The S-Corps do not have multiple classes of shares. Also, a percentage of corporate income must be paid for Social Security and Medicare taxes in an S-Corp.
You would lean towards a C-Corp entity if your business deals with capital gains and lots of shareholders. Venture capitalists like C-Corps because there is a preferred stock option. Investors also like this entity because of the merger, liquidation, and dividend options. There is also the option to switch from preferred stock to common stock, in an effort to grow the company. Converting an S-Corp to a C-Corp is easy too.
A major disadvantage of C-Corp entities is that there is double taxation on earnings. This works by imposing taxes on corporate profits and then again at the shareholder level. If you, as the owner, invest capital in your corporation, you may be exempt from double tax. There are no FICA regulations applicable to C-Corp employees.
Anyone in the business must have a good financial plan. When adopting this plan, you should consider whether a C-Corp or an S-Corp represents the best business entity for your interests. Both have pros and cons, and liability issues make them the best option over sole proprietorship or partnerships.
If you are in business, or planning to do so, you should seek out an experienced financial advisor and tax attorney. These consultants will help you make decisions about your business entity and tax strategies that will help you and your business move forward.