One of the first steps to take when creating a new company is choosing a business structure. A corporation is a popular choice because of the protections for personal assets from business creditors.
However, there are different types of corporations to choose from as well. Two of the most common are C corporations and S corporations. In some respects, they are very similar, but there are some important differences between them.
There are certain requirements for starting an S corporation that do not apply to a C corporation. S corporations can only have individuals as owners rather than general partnerships, limited liability companies or other corporations. Shareholders cannot be foreign investors; they must either be citizens or permanent residents of the United States. The maximum number of shareholders allowed is 100.
The formation of a corporation of any type involves filing articles of incorporation and any other required paperwork with the state government and paying any required fees. Those who want to create an S corporation and meet the requirements must specify. Otherwise, a newly incorporated company becomes a C corporation by default.
An S corporation does not have to pay corporate tax and instead allows pass-through taxation on the personal income taxes of the owner or owners. Owners of C corporations do pay corporate tax in addition to personal income taxes on the profit that they earn from the company. The current corporate tax rate is 21%.
Deciding to start a corporation is only the first step. Both C corporations and S corporations have advantages and disadvantages, and the business owner has to decide which will better serve his or her purposes.