Business Structures in the USA: Explaining a C Corps and S Corps

Choosing the Right Business Structure: C Corps vs. S Corps

Starting a business in the United States involves making intelligent choices about its structure.

Two standard options are C Corporations (C Corps) and S Corporations (S Corps). Let’s break down key questions to help you understand these structures better.

 What’s the Difference Between a C Corp and an S Corp?

C Corp:

This type deals with double taxation. The company is taxed, and shareholders are taxed on their dividends.
This entity offers limited liability and flexibility for growth, making it popular for businesses.

S Corp:

It’s smoother. Profits and losses go directly to shareholders, avoiding the double taxation hurdle.

Pros and Cons of Forming a C Corp

C Corp Benefits:

It’s attractive for big dreams – unlimited growth, different stock classes (normal and preferred), and pulling in (foreign) investors. But it’s a complex, more expensive process with lots of rules.

A C Corp allows foreigners, either as individuals or corporations, to own stock in this U.S. entity. The owners are legally separated from the company. This corporate structure ensures that the liability of shareholders and directors is limited.

C Corp Drawbacks:

Complexity, costs, and strict rules make it challenging.

Benefits and Disadvantages of a S Corp

S Corp Advantages: It’s straightforward. Profits and losses go straight to shareholders, saving them from extra taxes. There’s also an incredible 20% deduction on certain business income. But it has limits on shareholders and state tax issues.

S Corp Disadvantages: It gets tricky with limited shareholders and state tax stuff.
An S Corporation can only be established by Americans with a social security number. It is not possible for foreigners, as a company or as an individual, to choose this entity. Also, an S Corp may have a maximum of 100 shareholders, all of whom must be US citizens or residents.

 Is it Better to Be an S or C Corp for Small Businesses?

For small businesses, keeping it simple is often best. Many choose to be an LLC taxed as a C or S Corp. It saves on taxes and is less complicated. But it also depends on where you are located and what your business needs.

What About Large Businesses?

Big companies often go for the grandeur of a C Corp. It allows for unlimited growth, attracts all sorts of (foreign) investors, and issues different classes of stocks. The liability of shareholders and directors is also limited.