Choosing the right legal entity for your small business is imperative for its ultimate success, if you want to maximize your profits after taxes. Here’s an explanation of each type to help you decide which one makes the most sense for you, and give an idea of when it’s time to change the structure to one of the others.
C Corporation and Taxes
A C corp is a legal business entity used most often by large corporations and works best for things like IPO (initial public offering to be offered on the stock exchange), growing into an international business, and bringing in outside investors.
One downside that turns some away is double taxation. Owners pay personal income tax on the profits or dividends, and the business itself pays corporate income tax too. Now, there are ways to control this double tax, using your ability to leave some income in the business instead of distributing it. You also have the power to determine when the dividend will occur and in what amount.
- Works as a shield for your personal assets if the business has liability/debt or a lawsuit
- Requires separating personal and business finances
- Preferred by outside investors – allows an unlimited number of investors from anywhere in the world (however the business must be registered with the SEC after reaching certain thresholds)
- Recognized outside the US
- Can reinvest profits into the company at a lower corporate tax rate
- Can be owned by other corporations, LLCs, and trusts.
- Hold at least one yearly meeting for shareholders and directors
- Maintain minutes to display transparency in business operations
- Maintain voting records including names and ownership percentages
- Keep company bylaws at the primary business location
- File annual reports, financial disclosure reports, and financial statements
- Shareholders are allowed some high-level decision making, but the board of directors (appointed by shareholders) dictate the direction of the business.
C Corp vs S Corp
- A maximum of 100 shareholders is allowed
- Not recognized outside the US
- Shareholders must be US citizens or resident aliens
- S corp cannot be owned by most other entities (C corp, other S corp, LLC, partnership, or most trusts)
- There is only one kind of shareholder and they all have equal voting rights (C corps can issue different classes of stock to create different voting rights)
C Corp vs LLC
The LLC – limited liability company – is the new trend for most small and larger businesses, and for good reason. This can legally be treated as an individual or a corporation which is handy if you start small and plan to scale, and when you decide to go to corporation status unless otherwise filed, this would automatically be a C corp.
To learn more about this and ensure you’ve chosen the right structure for your growing business, contact the professionals at D&M Accounting and we’ll make sure you’re on the right path, towards maximum net profits.