For many small businesses and their owners, the future looks uncertain and the road to success is full of ups and downs and fraught with obstacles and pitfalls, which is why every decision needs to be made carefully. One of the key decisions to make concerns the business structure.
Under IRS rules, the C corporation is the standard or default corporation. An S corporation, on the other hand, has elected and meets the criteria for a special tax status which gives it certain privileges in terms of taxation. So what does that mean for small businesses? Does setting up a C corp in San Diego make sense for a small business?
What is the difference between form 1120 and 1120 C?
A certain level of complexity is a given regardless of the type of corporation you opt for. By default, when you incorporate you are effectively forming a C corp. But you may elect, if eligible, to be taxed under Subchapter S.
What are the similarities between S corps and C corps?
The key difference between C corporations and S corporations concerns taxation. But there are certain qualities that C corps and S corps share in terms of benefits and technicalities:
- All corporations offer limited liability protection, which means shareholders are not typically personally responsible for debts and liabilities incurred by the business.
- All corporations are separate legal entities.
- The procedure of filing formation documents with the state is the same for all corporations.
- All corporations have the same structure: shareholders (corporation owners), directors and officers.
- Both C and S corps have identical corporate formalities and compliance responsibilities in terms of adopting bylaws, issuing stock, holding meetings, report filing, etc.
What is better for a small business: C corp or S Corp?
Unlike S corps, C corporations have no ownership restrictions. They can have foreign owners, unlimited shareholders, and multiple classes of stock. C corporations are owned by shareholders and run by a board of directors elected by the shareholders. So whether a C corp or an S corp is better depends on the perspective.
From the point of view of federal income tax purposes and handling losses, S corp may be better. This corporation may also make more sense for business owners who want to draw profits as income and bypass double taxation, as well as for those who have a low personal income tax rate.
An especially attractive feature of S corps is that it enables owners to benefit from losses because they can use business losses to offset other income. S corps are also a better fit for owners looking to take an active part in their business operations.
In terms of profit distribution and fringe benefits, C corps win, and they also come with a diversity of ownership options and sources of capital. This makes them an excellent choice for businesses which:
- have foreign connections and want to attract investors.
- have different types of shareholders and owners with high personal income taxes.
- want to reinvest profits and need unlimited growth potential.
What are the major challenges of starting a corporation?
From a legal perspective, corporations are completely separate entities with their own legal and financial liability. Corporation owners are typically protected against all personal liability.
But forming a corporation in San Diego can be challenging. For instance, keeping track of tax, business, and financial records is time-consuming and daunting when you form a corporation, whether it is an S corp or a C corp. It will take some time before you can capitalize on your investment so it’s important to build a strong team to help facilitate the process of managing operations.
If you’re setting up a C corp in San Diego, we can help
Tax laws are complex, but you do not need to worry about that. Your transition into a C corp or from a C corp to an S corp can be smooth and pain-free and we are here to make sure of that. Leverage our resources and experience and let us take care of the paperwork. We will reveal all the benefits of C corporations for you to explore and discuss all the potential pitfalls and help you reach an informed decision fully aware of the financial and tax implications of your decision to incorporate.
Let us help you start a new chapter in your life and your career. We have a long and successful track record and we keep up with all the latest developments in the domain of business incorporation and tax regulations. Contact us now!