S-Corp vs. C-Corp
The most common types of legal entity structures for multi-owner businesses are a Corporation, Limited Liability Company or a Partnership. Deciding which type of legal entity structure is best for your business depends on numerous factors. Each type of legal entity has advantages and disadvantages. There is no one type of legal entity structure for multi-owner businesses that are not without serious disadvantages. However, the type of legal entity that you chose is complicated because it depends on several different factors. In addition to tax and liability implications, an often over-looked factor is ownership structure. This blog article discusses ownership structure for a Corporation.
Most business owners do not want to form a Corporation that is taxed as a C-Corporation (C-Corp), but instead want to be form a Corporation that is taxed as an S-Corporation (S-Corp). There are definitely tax advantages to being taxed as an S-Corp rather than as a C-Corp. The main tax advantage in an S-Corp is that you are only taxed once versus a C-Corp where the corporation is taxed, and then the shareholders are taxed. However, there are also tax advantages to being taxed as a C-Corp rather than as an S-Corp. For example, S-Corps may be liable for capital gains tax and be taxed on excess net passive income and built-in gains. In addition, with the tax reform recently passed by Congress, it might be advantageous to be taxed as a C-Corp.
Before you decide to make the S-Corp election, you need to understand who the shareholders will be, the number of shareholders, and whether or not there will be different classes of stock for financial rights. Depending on those answers, your company may not qualify to be taxed as an S-Corp (note: the S-Corp designation is for tax purposes and is obtained by the Internal Revenue Service; when your corporation is registered with the Minnesota Secretary of State, your corporation is automatically taxed as a C-Corp unless you timely file for S-Corp status with the IRS).
In a C-Corp, there are no restrictions on eligible shareholders, no limit on the number of shareholders, and you can have multiple classes of stock for both voting and financial rights. However, in an S-Corp, only natural persons and certain trusts can be shareholders, you are limited to 100 shareholders, and there can only be one class of stock for financial rights (different voting right stocks are permitted).
Before taking an S-Corp election, it is prudent to discuss the structure of your business and your goals with both your accountant and business attorney.
The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice or tax advice and should not be construed as legal or tax advice advice.