This is an excerpt from a presentation I give to college students and to prospective entrepreneurs about types of business entities.
A college professor (who’s also an attorney) told me that my presentation on this subject is the best, clearest and most-concise overview of the topic that she’s ever seen.
I’m flattered by the compliment, and will try to translate those positives into a series of blog posts.
In the previous segment in this series, we learned that the terms “C-corporation” and “S-corporation” are tax terms, not legal terms.
By default, all corporations start as C-corporations but can elect to be taxed as an S-corporation by filing paperwork with the IRS.
A C-corporation has the following characteristics:
- It is a separate taxpaying entity that exists apart from its owners. The C-corp pays income taxes on its net profit at the corporate tax rates.
- The reporting of income and expenses is basically the same as any other business entity, except … the final results do not pass through to the owners.
Advantages of C-corporations include:
- Can have an unlimited number of shareholders
- Ability to have multiple classes of stock
- C-corporation tax brackets may make it easier to accumulate funds within the corporation to fund future projects
- Tax treatment of benefits to the owners (in particular, health insurance) is more advantageous than any other entity
Disadvantages of C-corporations include:
- Double taxation – C-Corp pays tax on income; shareholders pay taxes when corporate income is distributed as dividends to shareholders
- Corporate losses don’t pass through to shareholders
- Must comply with corporate formalities
- Can be messy to get out of
Coming up in the next installment, we’ll cover S-corporations.