Finally taking the first leap to incorporate your business is exciting. You can look forward to the opportunities that open up to you. You also can look forward to complicated legal options, however. One decision in this process could make a major difference for your company’s finances: how you classify it.
Between the choice of S corporation or C corporation, it’s hard to know what the options mean when they only have one letter to represent them. The main differences between them regard ownership and taxes. In part one, we will discuss ownership.
In both S and C corporations, the business is owned by people who purchase portions, called shares, of the company. In an S corporation, only 100 people can hold shares, whereas the government doesn’t limit C corporations to a certain number of shareholders. These partial owners vote on members of a board of directors. The board makes decisions for the business in both types of structures.
If you decide to sell your business one day, the category you choose affects who would be able to buy it from you. Many types of companies, including other C and S corporations, can’t own an S corporation because of its unique properties.
Although the difference between ownership structures make S corporations seem restrictive, there are also many advantages to choosing S. Many of these benefits focus on taxes, which we will cover in part two.
Every new business will have unique circumstances. Sometimes, it’s not clear which option will be right for you. An experienced attorney can help you define your goals and how they align with each of these choices.