There are two types of corporations—C Corporations and S Corporations. When most people think of a corporation, their mind automatically goes to a traditional C Corporation, although they may not realize it. While both entities are remarkably similar, they have some significant differences as well.
If you are starting a business, you may want to consider forming an S Corporation because of its asset protection benefits and favorable tax treatment. As you are considering your options for setting up your business, you may want to browse through some of the most frequently asked questions regarding S Corporations below.
What is the Difference Between an S Corp and a C Corp?
Both C Corporations and S Corporations are separate legal entities, but only S Corporations are treated as “pass-through entities” for tax purposes. That means that they can avoid the most common pitfall associated with corporations: double taxation. For this reason, and others, S Corporations work well for many types of businesses. This distinction is perhaps the most well-known difference.
Unlike a C Corp, S Corporations are limited in the number and type of shareholders they can have as well. In addition, C corporations often have more tax deductions or breaks than S Corporations.
How Do I Create an S Corp?
Both C Corps and S Corps are created the same way. You must file Articles of Incorporation with the appropriate entity in your state, usually the Secretary of State. The Articles will contain very basic information about the company and its owners and directors. You should also pay a filing fee for this service as well.
Do I Need a Lawyer to Create an S Corp?
Technically, no. While having an attorney may be a good idea, depending on your business, you do not need any special training or skills to create an S Corp or any other business entity. If you have questions about the forms or the requirements, however, consulting an attorney may be a good resource.
How Is Stock Handled in an S Corp?
Like C Corps, S Corporations also have stock. You will set out how many shares of stock your company will have at formation. You should also describe the value of each stock at the outset as well. It is important to note that S Corporations, unlike C corporations, are restricted to having only one type of stock.
Who Can Be a Shareholder in an S Corporation?
S Corporations have some restrictions on who can be a shareholder and how many shareholders you can have. You can have no more than 100 shareholders, and each owner must be an individual who is also a resident of the United States. That means that an S Corporation can have no foreign investors or owners that are LLCs or other corporations.
How Do I Elect S Corporation Status?
The “default” when you file to become a corporation is that you will be considered a C Corporation. However, you can file a form with the IRS to be treated as an S corporation instead of a C Corp. In this way, S Corporations are similar to LLCs that elect to be treated as S Corporations. You should fill out Form 2553 and submit it to the IRS to have S Corp tax status.
How Does an S Corp Help with Asset Protection?
Corporations provide the most extensive asset protection benefits if the business is maintained properly. S Corporations are no exception. They provide both corporate veil protection and charging order protection, with the added benefit of avoiding double taxation.
How Can I Learn More?
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