Business Formation in San Diego: What Is the Difference between an S Corp and a C Corp?

business formation in san diegoIf you have decided to start your own business in San Diego, one of the first major decisions you must make is what type of legal structure is right for your business. Many business owners choose to incorporate because of the liability protection incorporation offers. If you choose to incorporate you will then need to choose which type of corporation is best for your business. Understanding the basic difference between an S corporation and a C corporation should help you make that decision.

The primary advantage to forming a corporation for most start-ups and fledgling businesses is that a corporation shields the owners from personal liability for acts and omissions of the business, as well as from debts of the business in the event the business does not succeed. Both types of corporations offer protection from liability. All corporations are considered C corporations by default unless an S corporation election is made at the time the business is incorporated. There are advantages and disadvantages to both options. The most important differences between an S corporation and a C corporation revolve around taxation and shareholders.

A C corporation is a traditional corporation. The primary disadvantage to a C corporation is double taxation. A C Corporation is taxed first at the corporate level and then again at the shareholder level. Therefore, if your business shows a profit of $100,000 this year the business itself must pay taxes on that profit and then you, as a shareholder, will also be taxed at the personal income tax level for any profits you earned out of that $100,000. A significant advantage, however, to electing to remain a C Corporation is that the number and type of shareholders the company can have is not limited as is the case with an S corporation. A C corporation, therefore, does not face the obstacles to growth that an S corporation sometimes encounters.

An S corporation is so named because the corporation elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The primary disadvantage to election as an S Corporation is found in the shareholder restrictions. An S corporation may only have one class of stock and no more than 100 shareholders. Furthermore, those shareholders may only be “allowable” shareholders, specifically excluding partnerships, corporations, or non-resident alien shareholders. Finally, foreign corporations cannot elect S corporation status. The most common reason for electing to become an S corporation is to avoid double taxation. Unlike the C corporation, shareholders in an S corporation are not taxed at both the corporate and personal level. Instead, profits and losses are passed through to the shareholders and taxed only at the personal income tax level.

Getting Legal Help with Business Formation in San Diego

Choosing which legal structure to use for your business will impact taxation, liability, and growth of the business for the life of the business. For this reason, you should consult with an experienced San Diego business law attorney prior to making your decision.

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