Choosing Between C-Corporation and S-Corporation
If you are planning to incorporate in Texas, you should be aware of the full range of options that are open to you. Incorporation can offer a number of benefits to your business, but there are significant differences in the types of legal entity that you can set up. Depending on the size of your business and your objectives for your business, you might want to set up a C Corporation or an S Corporation. Understanding the differences between each of these is important if you want your enterprise to be as successful as possible.
A C Corporation is a regular corporation. C Corporation is the default type for any small business that is incorporating. C Corporation status means that your business is now an individual legal entity, separate from its owners. As a small business owner, you are liable for your business and your business's debts. In a corporate situation, it is not the owner that is liable, but the corporation itself. You are personally shielded by limited liability. All you that can lose are your shares. There is a significant drawback to C Corporation status, however. C Corporations are subject to double taxation. Your corporation will pay tax on its earnings and shareholders will be taxed on their dividends. It is possible to minimize these taxes through a range of deductions on fringe benefits. If over 70% of your employees receive a fringe benefit then it is tax deductible.
S Corporation has some different advantages and disadvantages. The biggest advantage in an S Corporation is in taxation. In an S Corporation, the corporation is not taxed on its earnings. Rather, the owner or owners are taxed on money that they receive from the corporation. This avoids the double taxation of a C Corporation. There are, however, some rather strict requirements for S Corporations. All shareholders must be citizens of the United States or residents of the United States. You are limited in the amount of profit or loss that you are able to allocate to each shareholder. You are unable to deduct fringe benefits for employee-shareholders with over a 2% stake in the corporation. Deductibility is limited by the amount that you have invested in the company meaning you can not deduct more than the value of your stock. Due to these restrictions, many people choose not to opt for S Corporation status. It tends to be most suitable for smaller corporations as the restrictions on share ownership limit foreign investment. S Corporation status can be changed to C Corporation status after a certain period.
The decision to register as either an S Corporation or a C Corporation is usually based on profitability. While C Corporations are affected by double taxation, the greater level of deductibility can make them more profitable. In some companies, however, the limited taxation benefits offered by an S Corporation will make it a better choice. If you are unsure of what type of entity is best for your Texas business, www.texaslegalentities.com is a great source of information.
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