Whenever a new business is founded, the entrepreneur must decide what type of company it will operate us. Two of the most common choices are C Corps and S Corps—each of which has its own advantages. The choice you make depends largely on how you intend to run and structure your business.
Similarities of C Corps and S Corps
In both structures, you are typically required to pay a minimum franchise tax and file an annual statement of officers, along with a nominal fee. The corporation’s principals are expected to hold regular board of director meetings (at least annually, if not more often).
All books and bank accounts in both C Corps and S Corps are expected to remain separate from personal records and books. This is because the corporation is a formal business entity, and personal transactions must stay separate in accordance with federal law.
All owners of the company who also work for it are required to be on payroll, and payroll taxes must be withheld and matched with reasonable rates of pay. If the IRS ends up auditing the corporation and discovers this rule is violated, it will likely collect penalties and interest, in addition to payroll taxes owed.
Differences between C Corps and S Corps
Although there are plenty of similarities between the two models, there are also a number of different tax implications of which business owners should be aware. Here are a few noteworthy examples:
- C Corps file standalone tax returns and ultimately pay their taxes at a corporate level, with losses either carried backward or forward. C Corps may be taxed at a maximum rate of 35 percent. S Corps, on the other hand, do file a tax return, but loss or profit passes through Form 1120S K-1 to an individual income tax return. Ultimately, tax liability and taxes are paid at the individual level. The maximum tax rate here is 39.6 percent.
- C Corp owners are unable to withdraw funds in the manner of a partner in a partnership or a sole proprietor. Any funds withdrawn are subject to double taxation, unless they are expense reimbursements or loan repayments. S Corp owners are allowed to withdraw funds against profit, as long as reasonable compensation is paid through wages.
- C Corp owners have more fringe benefits, such as disability insurance and life insurance, compared to S Corp owners.
- C Corp owners are required to pay estimated tax based on the corporation’s profits. S Corp owners, conversely, are potentially subject to estimated tax depending on state rules. However, S Corps pay no federal income tax.
For more information on the similarities and differences of these two structures and the advantages each provides, work with an experienced business law attorney today.
Steven K. Hardy is Chair of the BoltNagi Corporate, Tax and Estate Planning Practice Group. BoltNagi is a well-established and widely respected business and corporate law firm serving clients throughout the U.S. Virgin Islands.