McMillan Metro Can Help You Understand The Difference Between An S Corps And C Corps And Determine Which Is Best For You
You’ve made the decision to set up your business as a corporation. The liability protection offered by the corporate structure makes that an easy choice. The harder choice comes in deciding what type of structure is best for your business—and not just today, but ten years from now. The business startup attorneys at McMillan Metro, P.C. have extensive experience in helping entrepreneurs make these decisions and then execute the often tedious day-to-day administrative necessities that come with maintaining them.
Let’s presume that you’ve already decided against using an LLC as your corporate structure. If that’s the case, then S Corps or C Corps are two remaining options. Each one has distinct advantages and disadvantages and they all boil down to exactly what kind of vision you have for your business.
An S Corp looks attractive on the surface, and it is. The tax benefits are substantial. Profits “pass-through”, straight to the personal tax return of you and other shareholders. This means they don’t have to be first taxed as corporate income and then again on your personal return. Furthermore, reporting your profits as personal income means that a lot of expenses can also be used to reduce taxable income.
In the early years of business, expenses may be high. More advantages are at the opposite end of the spectrum–small business owners who plan to sell their business to fund retirement will no doubt be attracted to the lower capital gains rate offered by an S Corp.
The S Corp structure allows up to 100 investors and for small to mid-sized businesses that are community-based, which can be sufficient. But this area is also where the disadvantages of the S Corp—and the need for considering the C Corp structure begin to appear.
When you set up as an S Corp, you can only issue one class of stock and your shareholders must be citizens of the United States. Businesses with big goals will need more than the one hundred investors. A firm with transnational ambitions needs the flexibility to take on investors from outside the U.S. And perhaps most important, any company that wants to go public will need to be a C Corp.
Other advantages that come with a C Corps include the ability reduce corporate income—and thereby taxation—through a variety of methods, most notably premiums on employee benefit packages. A skilled business attorney can help you make the best decision on how to set up both your individual salary and your profit flow to gain the best possible tax situation.
An easy way of understanding the S Corp vs. C Corp decision might be this—if you plan on staying in the small-to-medium range with local investors, go with the S Corp. If you’re thinking bigger, a C Corp has to be on the table.
Examining these long-term questions may seem overwhelming in the early stages of business development when the entire enterprise is enduring growing pains. This is where the guidance of an experienced McMillan Metro attorney, that has walked through this same process over and over with other entrepreneurs, yields excellent value.
We’ll bring up the big-picture questions that you might not see amongst the day-to-day challenges that come with creating a startup. And once your decision is made, we’ll lead the way with the extensive paperwork filing that has to be done and then the annual reporting and compliance measures that have to be taken for the state.
The early phase of a startup is exciting and the decisions made now will reverberate for years to come. Make you sure have sound guidance when you make those decisions. Contact us today to set up a consultation.