People starting new businesses in Texas should understand how C and S corporations differ in taxation and management structure.
When an entrepreneur in Texas gets an idea for a new business and begins making plans to get the company off the ground, many decisions must be made. In the midst of this exciting process, some of these decisions may be difficult because the best choice is not always clear. When it comes to selecting an operational model for a business, there may rarely be the perfect fit as each model has its own set of pros and cons. A good example is seen in the differences between S corporations and C corporations.
Taxation at the company or personal level
How taxes are assessed varies greatly between C and S corporations. At its most basic level, the corporation pays income tax for C corporations while the corporation pays no income tax for S corporations as explained by Fox Business. For S corporations, profits and losses are passed on to shareholders and they then have the responsibility of paying income tax at the personal level.
The U.S. Small Business Association notes one important caveat to the absence of corporate taxes for S corporations. This approach requires that all shareholders are paid what would be considered a wage or salary fair and in line with current market wages or salaries for the corresponding positions. If this does not happen, the corporation might be at risk for being taxed.
Entrepreneur explains that shareholders in C corporations are not able to deduct any business losses from their personal taxes. Shareholders in S corporations, in contrast, may deduct business losses on their personal tax returns.
Perks beyond basic wage or salary compensation
Forbes indicates that shareholders in C corporations may be eligible to receive additional benefits that are not taxed but that may have significant financial value. These include health, life or disability insurance. Such benefits are not available to shareholders in S corporations.
More than just taxes
The differences between S and C corporations extend well beyond taxation. Management structure and makeup must also be considered when deciding which model is appropriate for a business. In short, S corporations are far more limited on who they can allow to hold shares in their companies. There is a cap on the number and the residency of the shareholders. In addition, individuals alone may hold S corporation stock.
C corporations have none of these restrictions which may provide many benefits, especially for larger companies.
Professional advice is recommended
When making the decision about how to establish a new company, it is always recommended that entrepreneurs work with experienced legal staff. Talking to an attorney up front may help companies make better choices from the start.