It is important to structure a business entity that will best meet your needs before starting a new business. Even once you have selected a corporation over a partnership or LLC, there are still choices to be made. S corporations and C corporations have some similarities. There are also critical differences, and it is important to understand how each type of corporation functions before selecting the one that will best meet your business needs.
Only One Class Of Stock
There are several key differences in how ownership may be held in S corporations and C corporations. S corporations may issue only one class of stock, while C corporations can have multiple classes. S corps are limited to a maximum of one hundred shareholders – all of whom must be United States citizens or lawful residents. C corporations have no such restrictions on ownership. S corporations also cannot be owned by other S corporations, C corporations, LLCs, partnerships, or trusts. These stock and ownership restrictions make an S corporation unsuitable for many corporations. Be sure to consult with your business lawyer about your specific plans for issuing stock and apportioning ownership in your new business.
Many business owners prefer S corporations for the tax benefits they can provide. It is true that S corporations can provide a number of tax advantages. The main one is a single layer of taxation: unlike C corporations, an S corp is not taxed at the corporate level. All profits and losses pass through to individual owners who report them on their individual tax returns. The individual owners can also use business losses to offset business income and thereby reduce their tax liability related to the S corp. Finally, there is currently a significant federal tax deduction in place through the Tax Cuts and Jobs Act of 2017. Qualified S corp owners may deduct up to twenty percent of eligible “qualified business income.” So long as this tax deduction is in place, S corp status could provide significant tax benefits to S corp owners.
These benefits do not mean that an S corp is best for every business owner. As discussed, S corps have limits on ownership, which can impede a corporation’s ability to raise capital. S corps must usually limit owners’ ability to transfer their stock. This safeguard ensures that ineligible owners do not obtain an interest in the company and threaten its legal status as an S corp. S corps may also not issue preferred classes of stock. All of these restrictions give business owners less flexibility in raising capital and structuring the management of their corporations.
California Corporate Lawyers For All Your Business Needs
There are many ways to set up a new business entity. Be sure to work with an experienced corporate lawyer to structure the entity that is best suited to your unique business needs. By investing in an attorney, your business can have efficient management and ownership structures in place before you ever start operations. This infrastructure will help your business operate efficiently from the start – as well as preventing lost business opportunities and other avoidable expenses. Call (408) 441-7500 to schedule a consultation with one of the experienced California corporate lawyers at Structure Law Group.