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When I see the letters “S” and “C” grouped together, my brain instantly leaps to “SportsCenter.” But to those less sports-obsessed and more business-inclined, the first association with those letters may very well be that they refer to the two major categories of corporations: S-corporations and C-corporations.
What is the difference between the two? Well, in my previous post, I defined a C-corporation. Now, as a follow up post, I would like to define what an S-corporation is, and identify which type of corporation makes the most sense for those small businesses that are looking to incorporate.
To start, let’s take a quick look at a by-the-books definition of an S-corporation. As the IRS puts it, “S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.” In other words, S-corporations are not subjected to the so-called “double taxation” that takes place with C-corporations, as they do not pay corporate taxes—instead, all profits and losses from S-corporations as passed onto their shareholders’ individual income tax returns. And, for small businesses especially, this tax structure can mean all the difference in the world.
So, should your new small business be an S-corporation, or a C-corporation?
The short answer: barring unusual circumstances, I’d say you’re better off with an S-corporation. As Robert Wood wrote in Forbes, “Usually, C corporations make no sense for small businesses due to double tax on income and on proceeds of sale. Besides, if you incur losses, you want to claim them personally, favoring an S.” Granted, you should always consult with a legal expert before making any critical decisions about the structure of your business, but in more cases than not, if you want to start a small business as a corporation, I would recommend making it an S-corporation.
Have you started an S-corporation? What advice would you give your fellow entrepreneurs? Feel free to share your thoughts and insights in the comment section.
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