Incorporation (S-Corp, C-Corp)

A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. It is formed under state law and subject to tax at federal and state levels. Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions. If a business is organized as a corporation, the business owner is generally not personally liable for the debts of the corporation. (Exceptions my exist under state law.)



The advantages of starting a C corporation is that it allows for many owners. If you plan on starting a large corporation with thousands of shareholders, this is the route to take. The C corporation is the method of choice for publicly traded companies. Another advantage for C corporations is the lower tax rate on the first $75,000 of business income. This means that even if you have a small business, the C corporation can be beneficial.

One of the vital disadvantages of the C corporation is double taxation. With this type of business entity, you have to pay taxes at the corporate level, and then once the profits are distributed to shareholders, they must pay taxes on the money they receive as well. Another impediment of using a C corporation is that it requires a great deal of formality. You must have shareholder meetings, a board of directors and corporate minutes.



One of the major leverage of the S corporation is that S-Corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. This means that the income from an S corporation is simply passed onto the shareholders of the company instead of being taxed at the corporate level. Shareholders then pay taxes on this money at their marginal tax rate. Owners can also minimize self-employment taxes with this type of business structure. Salaries are subject to self-employment taxes, but distributions are not. An S-Corporation is generally exempt from federal income tax other than tax on certain capital gains and passive income.

S-Corporation is an attractive option, but there are a few detriments that should be considered before making decision. First, S corporations cannot have more than 100 shareholders. This makes it impossible for publicly traded companies to use, since they regularly have thousands or millions of shareholders. Second problem is that owners sometimes have to pay taxes on profit distributions that they did not receive if profit is reinvested back into the company.