How are C and S corporations different?
With two types of corporate structures from which to choose, Oklahoma entrepreneurs should evaluate their needs carefully.
The entrepreneurial spirit that has led many people and companies to success is alive and well in Oklahoma today. There can be many exciting elements and moments when establishing a new company. There are also many major decisions that must be made along the way. One of these is which type of business structure to establish.
The simplest type of business is a sole proprietorship but its lack of liability protection makes it unattractive to many entrepreneurs. For this reason, S corporations and C corporations can be popular. However, despite both being corporations, these two models are very different and it is important to understand each one before making a final decision.
Tax structure in C and S corporations
Forbes explains that the way in which taxes are assessed on C and S corporations is quite different and may make an S corporation appear more attractive to some people.
For both structures, any profits and losses of the company are passed onto the shareholders. These are then included on the individual tax returns of each shareholder. However, in addition, a C corporation pays income tax. This results in a double taxation as funds are taxed at the corporate level first and then at the individual shareholder level.
An S corporation pays no corporate income tax. Per Fox Business, shareholders may be able to deduct losses from their personal taxes and reduce their tax liability in this way.
Shareholder options in C and S corporations
While the taxation model may appear to make an S corporation election seem like a no-brainer, there are important features of C corporations that people should know about.
When it comes time to issue stock for a new corporation, the differences between the two models becomes very apparent. C corporations provide much greater flexibility. For example, there can be an unlimited number of shareholders in a C corporation. In an S corporation on the other hand, the number of shareholders is strictly limited.
Who can hold stock in an S corporation is also closely regulated. Only citizens of the United States are able to have ownership in an S corporation but C corporations do not have such a restriction.
Making the right choice for the business needs
Oklahoma entrepreneurs should always discuss their new business ventures with an attorney before making the final decision about an operating model. This gives them the best understanding of the pros and cons of different options so they know they are making the choice that is best for their companies.