In the February Bizquest newsletter, we discussed the S corporation, but mostly from the taxation perspective. This month we will focus on the C corporation, and also outline the primary similarities and differences between it, the S corporation, and the limited liability company (LLC).
Corporations are entities that exist separately from their owners, which are called shareholders. This is in contrast to sole proprietorships and general partnerships, where the business and owner or owners are legally considered the same. In order to form a corporation, the appropriate formation documents, usually called the articles of incorporation or a certificate of incorporation, must be filed with the state.
Corporations offer limited liability to their shareholders. Typically, shareholders are not personally liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts owed by the corporation. The shareholders' liability is often limited to the amount they invested in the corporation.
Some other advantages of a corporation include:
Not all income a shareholder receives from a C corporation is subject to the double tax. For example, if the shareholder is also an employee of the corporation, that shareholder will most likely receive a salary payment from the corporation. As long as the salary paid to the shareholder is considered by the IRS to be reasonable (or similar to the market salary rates for that position), it is treated as a business expense and is deductible to the corporation. This helps reduce the amount of taxable income the corporation has.
As discussed in the January and February Bizquest newsletters, S corporations and LLCs do not incur the double tax, but still provide limited liability to the owners. Both the S corporation and the LLC are pass-through taxation entities. Additionally, C corporations do not face the same ownership restrictions as S corporations, and transferring ownership with C corporations is typically easier than it is with LLCs.
When evaluating whether the corporate structure is right for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. If questions remain, it is best to seek the advice of an attorney or accountant.
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