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Should Your Company Be a S-Corp or a C-Corp?

Today’s post will be about the differences between S-Corporations (“S-Corps”) and C-Corporations (“C-Corps”). To illustrate why someone will choose a C-Corp, we will go over a case study of an actual client that decided to structure her company as a C-Corp. Knowing the differences between S-Corps and C-Corps can help you decide which is right for you.

Similarities and Differences Between S-Corps and C-Corps

S-Corps and C-Corps are both corporations. That means, they are formed exactly the same way. To become a S-Corp, you have to tell the IRS that you wish to be taxed as a S-Corp. S-Corps are only taxed on the shareholder level, whereas C-Corps are taxed on both the shareholder level and corporate level. This is referred to as “double-taxation.”

Requirements for S-Corp Election

However, not all corporations qualify to be S-Corps. To qualify to be taxed as a S-Corp, your corporation must have the following characteristics:

  • 100 or fewer shareholders;

  • Shareholders are all individuals and not entities; and

  • Only one class of shares

What Happens if You Don’t Qualify as a S-Corp

If you have more than 100 shareholders, have shareholders that are entities, such as corporations or LLCs, and have multiple classes of shares, you do not qualify as a S-Corp. Thus, you cannot take the S-Corp election. Because of these limitations of S-Corps, public companies and high-growth startups tend to be structured as C-Corps.

A Real Life Example

I worked with a client whose goals were to purchase services in exchange for a percentage of her company and to raise money selling equity to a large number of people. The company providing my client with services was a corporation.

Corporations can only have an ownership stake in a C-Corp or an LLC. In addition, her fundraising efforts would have required her to get investments from over 100 investors. However, it would've been significantly more difficult to sell equity in an LLC and to comply with the annual reporting requirements of an LLC. Given these factors, a C-Corp made the most sense.

If you have questions, we are here to help. You can schedule a free strategy session with us by clicking here.

This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.

#formation #LLC #incorporation #SCorp #CCorp

 
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