If your business is planning to incorporate, you’re likely investigating various types things like where to incorporate and whether or not to file for S selection in your paperwork. Like most Fortune 500 companies and half of all public companies, you’re probably considering incorporating in Delaware to take advantage of its many business-related benefits. Inc. Plan (USA) can help you incorporate in Delaware, and we can also help you decide between C-Corp and S-Corp. To give you an idea between the two, the following information may help.
Every business that incorporates is automatically deemed a C-Corp unless it completes the S selection paperwork upon incorporating. Some states do not recognize the S-Corp and will treat it as a C at tax time, but the federal government does. Many businesses will opt for the C-Corp if they have the intention to take their company public at some time. Of course, there are some disadvantages startups need to be aware of before choosing the C designation. There is a double taxation on assets, high income tax rates on any annual income over $75,000, and filing taxes tends to be a complex process requiring an accountant. In the C-Corp model, the corporation will pay income tax on its net income.
Unlike the C-Corp, the S-Corp does not apply double income tax assessment. In the S-Corp model, taxes are applied only once at the shareholder’s level. Of course, not every business is eligible to file for S-Corp. An S-Corp must have fewer than 100 shareholders and they must be U.S. citizens or legal resident aliens of the U.S. If you are a small U.S. business, the S-Corp requirements may be easy to meet. Like C-Corp, S-Corp accounting can be tricky, so it’s essential to involve knowledgeable accounting staff to assist with tax filing.
Many startups do opt for the S-Corp status because it tends to involve less corporate tax, but it’s still a good idea to discuss your particular operation and plans with us at Inc. Plan (USA). Many small businesses can’t afford the double tax of the C-Corporation, but if you have plans to go public, it’s still a worthwhile consideration. If you are a C-Corp, you can still apply for S-Corp down the road, but that will not get you out of paying C-Corp taxes for some time. Your accountant can provide you with some estimates based on your expected income to give you some ballpark figures of what you might have to pay if you switch to S down the line.
S-Corp selection can be terminated at a later date. The business can terminate it or the IRS can if the company fails to meet S-Corp criteria. For example, a non-qualifying shareholder might come into possession of company stock. Take your time to determine which corporation is right for your business. If you do qualify for S-Corp, be sure to examine its benefits closely as well as its negative aspects. Again, professional assistance is key for assessing what type of corporation is ideal for your business.