C Corporations          Order Form

C Corporations are great for businesses that:

• Anticipate having large (100+) numbers of shareholders

• Anticipate that their shareholders will come from both inside and outside of the United States

• Anticipate becoming a public, listed company at some point

• Want to establish comprehensive medical insurance for employees and officers

• Want to take advantage of the maximum number of tax deductions
  and tax credits available to business owners.

• Are NOT planning on holding title to appreciating assets such as
  real estate, stocks, bonds, notes or other securities.

C Corporations are the most common types of business structure and the one that most people think of when they think of "company." They are the the preferred structure of businesses that want to have an unlimited number of shareholders, who may live inside or outside of the United States, and for businesses who are planning to become public, listed companies.

C Corporations are protected structures, which means that they operate completely independently of their owners (called shareholders). Shareholders can't be sued for any wrongdoings on behalf of the Corporation - in fact, the most that a shareholder could lose is what he or she put in. While officers and directors of C Corporations can be sued for acts of the Corporation, they are usually protected from liability by law, unless they have committed an illegal act on behalf of the Corporation, or have tried to enrich themselves directly at the expense of the Corporation.

C Corporations file their own separate tax returns and are taxed at a separate rate (which is based on net income).

Because that rate is lower than most personal rates (it starts at 15 percent on the first $50,000 in profits), C Corporations have long been favorite business choices. Shareholders may receive some or all of a C Corporation's net profits, but C Corporations may also elect to retain their earnings for future growth and development.

C Corporations also have more tax benefits and deductions available than any other type of business structure. For example, C Corporations may establish medical and dental plans for their officers and employees, and write off the entire cost of the plan. With health care costs today, this is a significant tax deduction! Even better, those who receive medical benefits under the plan receive those benefits tax-free as well. No other business structure provides tax-free medical benefits to employees and officers. 

Because C Corporations pay tax at their own rate, any after-tax profits distributed to shareholders wind up being taxed again, this time at each shareholder's personal rate. This is the "double-taxation" issue you've heard about, and historically it has been the major downside to using C Corporations. However, recent changes in tax laws have lessened the rate at which shareholders pay taxes on these distributions, and in some cases it can be a better choice, especially for high-income shareholders.

C Corporations are a bad choice if your business is going to include investing in real estate or the stock market. When you sell appreciated assets out of a C Corporation you will wind up paying additional capital gains that you wouldn't pay if you used a different type of business structure, such as a limited liability company or a limited partnership.

S Corporations          Order Form

An S Corporation looks the same from a legal standpoint as a C Corporation, but from a tax perspective, the two are completely different.

S Corporations prepare and file their own tax returns, but don't pay tax on their net profits. Instead, those net profits are divided amongst the shareholders in proportion to their ownership percentages, and the shareholders then pay taxes on their individual share of the profits. This avoids the double-taxation issue that C Corporations have, but it's harder for S Corporations to retain earnings for future growth and development.

S Corporations also have fewer tax deductions available to them. While an S Corporation can establish a medical plan and write off all of its costs, employees and officers receiving those benefits must declare them as taxable benefits and pay tax on them. 

Another key difference is ownership restrictions. Because the owners pay the taxes, S Corporation ownership is limited to US resident taxpayers only, and each S Corporation may have a maximum of 100 shareholders. If an S Corporation breaches this ownership restriction, it can have some severe consequences, including the automatic termination of S Corporation taxation and conversion to C Corporation status by the IRS.

Because of the ownership restrictions, it is harder to resell S Corporation shares than C Corporation shares, and it is for this reason that S Corporations are not suitable for companies who wish to go public. But that doesnt mean you can't start as an S Corporation in the beginning, and convert to a C Corporation as your company grows! Converting from an S Corporation to a C Corporation is a very simple procedure. However, once you've changed, you can't go back, so make sure you review this decision with your financial advisors ahead of time!

S Corporations also have the same problems with capital gains on the sale of appreciated assets that C Corporations do. This means that they are not a good choice to hold and sell appreciating assets, because you will wind up paying more in tax on a sale than you would if you held it in a more asset-friendly structure.

One place the S Corporation shines is for beginning businesses where expenses are high and net profits low. That's because S Corporations can stream income into two parts: income and profit distributions. This can have some huge tax savings for its owners, if things have been structured properly!