Forming a corporation in California offers protection for your personal finances in the form of limited liability. Once formed, there are two different types of corporations for tax purposes: so called ” S-corporations” and “C-corporations.”
Though similar in some ways, each offers different advantages for your business, as well as potential downsides. The type you choose depends largely on your goals and objectives for the corporation.
According to Fundera, you have to file articles of incorporation with your state government to form either a C-corp or an S-corp. You will also have to issue stock to sell to shareholders, who become part owners of the company. The shareholders will then elect a board of directors that will oversee policy issues and management. Both types offer owners limited liability so that, if you are a shareholder, your personal income cannot go to pay private debts.
Taxation is the big difference between a C-corp and an S-corp. The former pays corporate income tax; the latter does not. Additionally, an S-corp has requirements for shareholders that a C-corp does not. Specifically, a C-corp has no limit upon the number of shareholders allowed, while an S-corp can only have 100 or fewer.
An S-corp may be the better choice for you if you want to avoid double taxation that can occur when you have to pay both corporate taxes and personal taxes on company profits if you receive them as shareholder dividends. However, the advantages of a C-corp are that it is relatively easier to set one up, and because of the unlimited number of shareholders, it is easier to raise money for your business.
The information in this article is not intended as legal advice but provided for educational purposes only.