S CORPORATION: BENEFITS AND REQUIREMENTS

A FEDERAL TAX STATUS WITH SEVERAL ADVANTAGES.

Corporation that meet certain requirements can elect an s corporation status with the IRS. This federal tax status enables companies to “pass through” their taxable income or losses to owners/investors in the business, according to their ownership stake in the business. By default, companies that do not specify a tax status with the IRS are considered to be c corporations – with means that they will be taxed as a c corporation. On the other hand, by electing s corporation status, a corporation can eliminate the disadvantage of “double taxation” of corporate income and shareholder, dividends associated with the c corporation tax status. The cost of a S-Corp can vary. Say a corporation makes $300,000 in a given year – if it is an s corporation, the business itself will not be taxed for that amount; instead the company’s shareholders will be required to pay taxes according to their share of the company. In this scenario, if the company has three shareholders, each with an equal share of company stock, each shareholder will pay taxes on $100,000. If the c corporation makes $300,000 in a year, then the company would pay taxes at the current federal corporate tax rate of about 34%. If the remaining profits of $198,000 are distributed to the three shareholders as dividends, each shareholder will pay taxes on $66,000 in dividend income at the current federal dividend tax rate of 15%. S corporations, like other types of corporate entities, also keep owners’ personal assets safe from company debt and judgments against the business. In short, the s corporation status offers the following advantages:

  • Limited liability: Company directors, officers, shareholders, and employees enjoy limited tax returns

  • Pass-through taxation: Owners report their share of profit and loss on their individual tax returns

  • Elimination of double taxation of income is not taxed twice; once as corporate income and again as dividend income.

  • Investment opportunities: The company can attract investors through the sale of share of stock

  • Perpetual existence: The business continues to exist even if the owner leaves or dies.

  • Once-a-year tax filing requirement (vs. quarterly for a c corporation)

ADVANTAGES OF STARTING A C CORPORATION

PROTECT YOUR PERSONAL ASSETS WITH THIS POPULAR CORPORATE STRUCTURE.

The most common type of corporation in the U.S is the C Corporation By forming a C Corporation, business owners create a separate legal structure that helps shield their personal assets from judgments against the company. C Corporations have a specific structure that includes shareholders, directors, and officers.

THE C CORPORATION IS A TIME-TESTED BUSINESS FORMATION. IT HAS MANY ADVANTAGES, INCLUDING:
  • Limited liability for directors, officers, shareholders, and employees

  • Perpetual existence, even if the owner leaves the company

  • Enhanced credibility among suppliers and lenders

  • Unlimited growth potential through the sale of stock

  • No limit on the number of shareholders, although once the company has $10 million in assets and 500 shareholders, it is required to register with the SEC under the Securities Act of 1934

  • Certain tax advantages, including tax-deductible business expenses

The C Corporation structure does have its drawbacks. For instance a C Corporation’s profits are taxed when earned and taxed again when distributed as shareholders’ dividends what’s known as “double taxation.” Shareholders in a C Corporation also can’t deduct any corporate losses. To avoid these concerns, many small business owners choose to form as S Corporation instead.

START PROCTECTING YOUR ASSETS BY FORMING A C CORPORATION

Now That you are aware of the pros and cons of a C Corporation and if you wish to start one, California New Business Bureau can help you form your new C Corporation in any state or the District of Columbia. We’ll help you draft Articles of Incorporation for your business and file them with the state. Remember, once you’re incorporated, your C Corporation must adopt bylaws, hold directors’ and shareholders’ meeting, and issue stock to owners. California New Business Bureau can help you with these and many other business requirements.