When a corporation is formed in California, it will be deemed a C-Corporation by default. The terms “C-Corp” and “S-Corp” refer to tax classifications for different business entities. If a business wants to become an S-Corporation, Form 2553 will need to be completed and filed with the Internal Revenue Service.
S-Corps and C-Corps have a few different key differences between them – one of them is how they are taxed. For instance, if your business is a C-Corporation, you will pay taxes on business income. In addition, C-Corp owners are also obligated to pay tax on the income they receive as dividends paid to the owner, resulting in double taxation. In contrast, S-Corporations only pay one level of tax. The owner of an S Corporation will report the company’s revenue as personal income. This means business profit is taxed only at the shareholder level, and not at the corporation level.
Advantages of an S Corp
The primary advantage to the S-Corp status relates to tax benefits. There are an array of tax deductions and tax credits available to S-Corp owners. In addition, S-Corp owners only need to provide business income and losses on their personal income tax returns. In general, an S Corp can deduct up to 20 percent of business income on a personal tax return. This means that if a business owner has an S-Corp, they can write off any business losses on his or her personal tax return.
Advantages of a C Corp
The advantages of establishing a C-Corp include enhanced equity financing and being more attractive to investors due to the well-defined ownership and management structure associated with a C-Corp. Despite the reputation S Corps enjoy for offering tax benefits, it is important to note that C Corps enjoy reasonable tax treatment. For example, the owner of a C-Corp is able to deduct 100 percent of charitable donations and contributions on their corporate tax return. In addition, an owner can also help their employees by deducting benefits such health insurance.
As stated above, when you file your articles of incorporation to become a corporation in California, your business will automatically be deemed a C-Corp. However, that does not mean the C-Corp structure is best for your particular needs. To determine which corporate entity is best for your company (i.e. keeping the C-Corp status or switching to an S-Corp), hence, it is in your best interest to ask the following question:
- Do you eventually want to sell your company?
- Do you want to have and manage passive shareholders?
- Will you be raising money and issuing preferred stock?
- Are you comfortable with double taxation?
Have Questions or Need Advice Regarding Whether to Maintain Your Business as a C-Corp or an S-Corp? Contact an Experienced Business Lawyer in Los Angeles Today
If you have questions or need advice about setting up a business entity, please contact the highly reputable Hakim Law Group today. Our team of highly experienced business lawyers in Los Angeles stand ready to help your business establish a sound foundation for your business. For further information or to schedule an appointment with an expert business attorney in Los Angeles, please contact The Hakim Law Group at 310.993.2203 or visit www.HakimLawGroup.com to learn more.