What is a C corporation, or C corp?
When you go to the state, physically or virtually, to incorporate a corporation without any special features, the corporation will be default as a C corp.
Shareholders will be the owners of a C corporation. The company has a separate legal personality from the owners. Moreover, there is no limit to the number of shareholders in the company. You can also have an unlimited number of stocks and stock types.
In the matter of tax, you must submit to the state the business taxes for income generated by the corporation. Besides, your corporation will be subject to the franchise tax and annual report requirements. The amount will vary depending on the number of shares you are planning to authorize and issue. A C corp may have to face double taxation.
For business liabilities, if you are a shareholder of the corporation, you won’t be liable for debts and obligations of the corporation. You are only responsible for your own debts and claimants. And vice versa.
Forming a C corporation is more complicated compared to other business entities such as LLC or general partnership. First, you must have a company name that follows the state regulations. Next, you appoint a registered agent and prepare all required documents and information. Then you can file the certificate of incorporation to the state of Delaware, division of corporations.
After you successfully obtain the certificate, you must consider other post-incorporation procedures such as bank account opening, bylaws adoption, Employer identification Number application.
What is an S corporation, or S corp?
When you hear about S corporations, you must think about a general corporation like a C corp, but don’t misunderstand the concepts.
An S corporation is a status you can elect for your Delaware company. You can have an S corp form an existing Limited Liability Company (LLC) or a C corporation. If you form an S corporation from a C corporation, the structure and taxation of the business entity will be different.
Like a C corp, shareholders will be the owners of the company and the ownership can be flexible due to the owned share flexibility. Moreover, it has a separate entity from the shareholders. Additionally, the shareholders won’t be responsible for the liabilities of the company such as debts and legal obligations.
However, an S corp is only limited to 100 shareholders and 1 class of stock. So it can’t fit for a larger business.
In addition, an S corporation has pass-through tax status. This means that it is taxed the same way as an LLC. To be specific, all profits and losses of the corporation will be counted as the personal income of the shareholders. Thus, the income tax will be your personal income tax.
In some cases, the personal income tax may be greater than the federal income tax rate. For instance, if the income is over US$ 600,000, the personal income tax rate is 37% at the federal level.
How to decide between a C corp and S corp?
An S corp and C corp have different tax treatments and structure. Nonetheless, the features are mostly in common.
An S corp is more flexible in terms of taxation and formation but its structure is limited. Therefore, choosing either of them will depend on how you want your company to be taxed and structured.
To make the decision, you must determine the following factors:
- Are you planning to get the corporate acquisition in the long term?
A C corp will be more efficient when it comes to the acquisition. It will be easier to get funded thanks to the flexibility of stock types and number of shareholders.
- Do you mind the double taxation procedure?
If double taxation is an insignificant matter to you. A C-corp is no more a disadvantage to you.
- Do you mind doing extra paperwork?
As mentioned earlier, you are required to apply for an S corp status from a C corp if you want to have an S corporation. So you must apply the S corp via the Internal Revenue Service (IRS) to elect the S corp status to your corporation.
- Does your corporation make significant income?
An S corp will be taxed as personal income tax. So you may pay higher taxes if your company makes a huge amount of income.
To sum up, you will pick a C corp or an S corp depending on your business needs. If you prefer an entity with larger structure, ownership and stock class flexibility, tax advantages for huge revenue income, a C corp is a perfect fit. Otherwise, an S corp is a more appropriate option.
If you decide to start a Delaware company formation, a C corp and an S corp are great ideals. Corporations are the second-common choice of incorporation in Delaware thanks to a great range of benefits. Do concern carefully about your business needs before deciding to opt for a C corp or S corp.