To limit their personal liability, many business owners choose one of the three forms of business – the traditional “C” corporation, as “S” corporation, or a limited liability company (LLC). With each, there are trade-offs in flexibility, taxation, personal liability, and even how fringe benefits are taxed. Here are the basic differences between the two corporate forms – the “C” corporation and the “S” corporation.
A principal difference between “C” and “S” corporations is how they’re taxed. The earnings of a “C” corporation are taxed first at the corporate level. Any dividends paid to shareholders are then taxed again as personal income. In contrast, an “S” corporation’s earnings are taxed only once, with each shareholder including his/her proportionate share of the company’s earnings in his/her personal income.
The double taxation of a “C” corporation is not always as bad as it seems. For example, if you’re leaving most of the earnings in the company to fund growth, or if you’re a sole owner and take most of the earnings as salary, the tax difference may be small. In other cases, however, and especially if you plan to sell or liquidate the company, an “S” corporation may have significant tax advantages.
But taxes aren’t everything. An “S” corporation is limited to 100 owners and may only have one class of stock. If you plan to bring in new investors to fund growth, or if you plan to go public, you’ll need the flexibility of a “C” corporation structure. There are many other differences to consider too, and there’s no simple answer that’s right for all companies. Switching from one type of corporation to another can be complicated, so it’s worth seeking expert advice and making the right decision up front. Contact us for help in making the best choice in your business situation.
Dennis Frankeberger, CPA/CFF, CFE is a partner with Frankeberger Vausher + Company, CPAs which is a full service CPA & business consulting firm. They provide a full compendium of professional services including traditional taxation and financial statement preparation as well as strategic consulting for companies in areas such as: Internal Financial and Operating Controls, all activities for Buy/Sell transactions, valuation requirements, estate planning assistance as well as being Expert Witnesses in Litigation Matters. In addition, they provide expertise in Forensic, Fraud and Embezzlement situations as that need may unfortunately arise.
Please contact Dennis Frankeberger at 909-597-1100 to discuss this article or any other financial or accounting issue that may be of interest to you.