Starting a business? We recommend getting in touch with a business law attorney. Among other decisions, you will need to decide between forming a C-corporation or an S-corporation. We will explain the difference and the pros and cons of each.
Startups generally choose if they want an LLC (limited liability company), C-corporation, or S-corporation for a business structure. Under an LLC model, members of the company cannot be held liable for the business’ liabilities and debts. This post, though, will focus on the C and S-corporation structure. The difference comes down to these three areas: taxation, ownership, and shareholders.
Under a C-corporations, companies pay taxes at a corporate level. Any members with dividends are required to pay personal taxes as well. In other words, the business is double taxed. With S-corporations, businesses are only taxed once on the shareholders’ income taxes.
C-corps are allowed to have unlimited shareholders, and anyone can be a shareholder. S-corps can only have up to 100, and corporations and partnerships are prohibited from becoming shareholders.
C-corps can sell various stock types, giving some shareholders more voting power than others. Only one stock type is available under S-corps, making all shareholders equal.
Generally, we recommend S-corporation for small to medium sized startups, since C-Corporations mean double tax on income and on proceeds of sale. Once startups become profitable after several years, they may elect to switch to a C-corporation to take advantage of more growth potential.
Starting a new business? Our firm will determine which structure is best for your business type. We help all industries tackle issues from bankruptcy to policy planning. Curtis and Casteel Law Group has helped hundreds of Lynnwood businesses set up a C-corporation and S-corporation model.
Edited by Justin Vorhees
Proudly serving the people of south Snohomish County, north King County, and the Greater Seattle area