by Deborah Sweeney | Featured Contributor
For all the new small business owners out there deciding which entity to file their business as, and the already-formed corporations thinking about tacking on a different election, this is the post for you. Choosing the right entity for your business is a huge enough deal, weighing the pros and cons of all the different elections is another entirely different ball game. Basically, there’s a lot to research when you start a business.
First of all, how exactly does one define a regular Corporation?
A corporation is an independent legal and tax entity, that’s legally separate from the people who own, control and manage it. Because of this separation, the owners of a corporation don’t use their personal tax returns to pay tax on corporate profits—the corporation itself pays these taxes.
Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses, and the like.
A C-Corporation is the most general type of corporation you can have. The owners of a C-Corporation are mostly protected from personal liability for business debts, although, if the corporation doesn’t follow the formalities of a corporation, there can be problems with personal liability. As a result, the formalities such as filing annual reports, maintaining separate bank accounts, keeping track of meeting minutes, and holding shareholders meetings are very important.
A huge benefit of owning a C-Corporation is that the owners can share corporate profits with the corporation, lowering the overall tax rate. A C-Corporation can also have an unlimited number of shareholders. Plus, if you wish to take your company public (selling shares over a public trade), you will definitely need to be in a C-Corporation, so starting out as one saves you some time and trouble down the road.
An S-Corporation is a C-Corporation that has elected to be treated as an S-Corporation. It has the same personal liability protection and potential issues as a C-Corp, but it also comes along with some very precise formalities. An S-Corporation can only have a certain amount of shareholders and the shareholders must meet specific requirements. An S-Corporation also allows for corporate profit sharing, but the allocations must be done in accordance with the shares each owner owns. A benefit to this is that owners can use any losses of the corporation on their personal income tax returns, reducing personal tax liability in many instances.
In an S-Corporation, all business profits “pass through” to the owners, who report them on their personal tax returns. The S-Corporation itself does not pay any income tax.
Therefore, an S-Corporation elects not to be taxed as a corporation. After the corporation has been formed, it may elect “S-Corporation Status” by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well).
Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA
As CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers.
Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites. She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others.
In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @deborahsweeney and @mycorporation.