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How Does the Corporation Type Affect Your Business?

What business structures can I choose from

How Does the Corporation Type Affect Your Business?

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Most startups start off as a sole proprietorship or general partnership. But then your startup starts to grow and evolve and its priorities begin to shift, so you may need to change your business entity structure and incorporate. 

You need to accommodate the changing needs of your company as best as you can, and to do that, so you start browsing your options with the help of S and C corporation formation service professionals.

For instance, an S corp is a popular choice as it enables you to save on taxes, but the same can be said for C corps ever since the tax rate was slashed in 2017. Each corporation and business structure comes with certain legal implications, affecting shareholders’ personal liability protection and tax liability. 

Here is an overview of your options if you are considering setting up a corporation in San Diego.

What business structures can I choose from?

You have the following business entities to choose from:

  • Sole proprietorship
  • Partnership
  • Limited liability corporation
  • C corporation
  • S corporation

When you incorporate, your business automatically becomes a C corp. Much like a C corporation, an S corporation can take the form of a partnership, corporation, or LLC. With any corporation, personal income tax is due on the salary and any dividends received. 

It all boils down to your level of commitment, ambition, and drive. Each business structure comes with its own set of pros and cons, but let’s focus on corporations for now.

What is the downside of the C corporation?

The tax rate for C corps is 21% under the 2017 Tax Cuts and Jobs Act. With lower corporate tax rates, C corps are bound to become more attractive to small business owners, although the decision ultimately depends on profit levels and personal income tax. 

For many small businesses, S corps may still be better due to benefits such as pass-through taxation, but the choice is far from straightforward. Forming a C corp comes with certain tax benefits as well, and the most important one may be that company profits are taxed independently of owners’ profits. 

Ironically, this brings us to one of the key downsides of C corps: the risks of double taxation, which is when profits are taxed at the corporate level and then through individual income tax returns. 

Double taxation adds to the complexity of this corporate structure, but it is avoidable, although it is a solution that comes with the added cost of hiring a financial advisor specializing in taxes.

In terms of ownership, C corps offer a higher level of flexibility and fewer restrictions apply. However, the decision-making process is left to the board of directors, elected by the shareholders.

The choice ultimately depends on how you see the future of your business. Once you sell a C corp, you get to keep your personal assets, which is the advantage of having the corporation as a separate legal entity. 

How does a C corp compare to other business structures?

A C corp is fairly flexible business structure and it gives you more options for raising capital and fewer restrictions on ownership, classes of stock, number of shareholders with a lower maximum tax rate. 

The shareholders are the owners of a C corporation, but it is the corporation that owns the business. The shareholders elect the board of directors, but it is the board that oversees and directly manages corporate affairs and handles the decision-making process. As for the day-to-day operations, these are in the hands of officers who are appointed by the board.

The safest and most reliable way to decide if a C corp is the way to go is to do your research meticulously and have a clear understanding of all the key considerations and implications of your decision. 

Having an overview of the pros and cons of C corps is a good starting point as it allows you to draw conclusions based on the specifics of your current situation and the future prospects of your business. 

What is the downside of the C corporationA valuable resource for C corporation formation service in CA

Nobody knows taxes better than experienced tax consultants. Here at David York’s Tax Service, we bring clients a full continuum of services from incorporation to payroll and bookkeeping, to tax preparation and filing. We can help you better understand what you are up against in terms of tax implications and other technicalities, make the most of the entity structure you choose and rise to all the challenges that may arise along the way. 

If you decide to launch a C corp, we are here to lend you a helping hand and spare you much of the stress and hassle. To find out more, do not hesitate to contact us today!