According to the U.S Census Bureau, there were more than 4.4 million new businesses created in 2020, which is the highest total of new businesses created on record. If you too want to get in on the latest entrepreneurial wave, you’ve come to the right place. This guide will give you a breakdown of the different types of corporations and give you some ideas on which type of corporation might be best for you.
What is a Corporation?
A corporation is a separate legal entity created by a group of shareholders who share ownership of a legal entity. The corporation is created by law and given the same rights as a natural person. They can own property, enter into contracts, incur liabilities, and sue and be sued. The C corporation and the S Corporation are two types of entities to consider. Each has unique pros and cons over the other.
C Corporation (C-corp)
A C-corp is a legal structure for a business in which the business owners, or shareholders, are taxed separately from the legal entity. Profits earned by a C-corp are taxed and reported on the company tax return. Any profit distributed to shareholders as dividends are taxed again and gets reported on their personal income taxes. This creates what is known as “double taxation.”
A C-corp limits the personal liability of the owners, shareholders and employees. In that way, any debt belonging to the company does not become personal debt obligations to anyone associated with the company.
Once this type of entity reaches specific thresholds, it must register with the Securities and Exchange Commission (SEC). This creates an additional layer of legal requirements that must be kept.
S Corporation (S Subchapters)
An S corporation is also referred to as an S Subchapter. An S Corporation is not subject to the “double taxation” associated with a C-corp. The profits or losses of an S subchapter pass through to the owners. The owners are taxed on their share of the profits or losses at individual tax rates.
Money received from the small business can be characterized as salary or dividends. As a result, the owners benefit from a lower liability for self-employment tax. This type of entity can also claim deductions for business expenses and wages paid to employees.
A major disadvantage of the corporation is that is it more complex to manage. Owners must abide by strict requirements for how salary is paid to owners and employees. Noncompliance could lead to increased scrutiny from the IRS.
Which is Best For You?
Selecting the best option for your company requires careful evaluation. Here are a few things to consider:
When an S Corporation Makes Sense
S corporations were designed for smaller businesses. To qualify, your business must be owned only by U.S. citizens and have a limit of the number of shareholders to no more than 100. An S corp may be right for you
- You want to avoid double taxation and possibly be taxed at a lower tax rate
- If you have a low personal tax income rate which would save you money on your taxes
- You want to use business losses to offset other income
When a C-Corp Makes Sense
On the other hand, C corporations allow foreign owners, unlimited shareholders, and multiple
classes of stock. The C-corp may be right for you if:
- You need unlimited growth potential
- Want to issue different classes of stock to investors
- Your owners have high personal income tax rates
- You have foreign connections
How to Form a Corporation in Missouri
There are just a few steps to creating a corporation in Missouri:
- File the Articles of Incorporation with the Missouri Secretary of State
- Pay the filing fee
- Select a Registered Agent
- Create the corporate bylaws
- Create an Employer Identification Number (EIN) with the Internal Revenue Service (IRS)
The corporation is one way to protect the owner’s personal assets in the event of a lawsuit and limit the ability for creditors and lenders to get to the shareholder’s personal assets for debts the business owes (unless they sign a personal guarantee for a business loan). Another popular business entity type is the Limited Liability Company (LLC). Just like the corporation, the LLC creates a separate entity and provides the liability protection of the corporation while providing the ease of operation of a sole proprietorship, mainly via because the LLC doesn’t require an annual meeting, having a board of directors, issue stock certificates, and other corporation formalities.
Starting a business is an exciting endeavor. Choosing the right business structure is critical to shielding your personal assets while you build your company.