Why many Shareholders Prefer the C Corp Status over the S Corp Status

Posted by on May 29, 2017 in Business Law | 0 comments

A Corporation is a type or business entity wherein a group of shareholders assumes an existence that is independent of the individual shareholders, making this group’s powers and liabilities, therefore, distinct from those of its members.

A corporation limits the liability of shareholders; thus, even if is held liable for damages in a civil suit, the most shareholders can lose would be their investment in the stock. Personal properties and assets of shareholder are not on the line for corporate liabilities.

All corporations, as stipulated in subchapter “C” of the U.S. tax code, are C corporations unless their owners file for S status (this happens when all shareholders make a timely filing of Form 2553 with the IRS after they agree in writing to the S corporation election). Taking no action, however, will mean that a corporation is a C corp.

C corp and S corp are types of corporate business entities. Their difference is based on payment of taxes and ownership. With regard to ownership, S corporations cannot have more than 100 shareholders, all of whom must be U.S. citizens or residents. C corporations, on the other hand, can have an unlimited number of shareholders who may also be non-U.S. citizens or residents.

On the issue of taxation, S corporations are pass-through tax entities, thus, no tax is paid at the corporate level. All corporate profits and losses are reported on the tax return of shareholders. Under the C corp status, however, because corporate profits are taxed at the corporate level, there will be the disadvantage of double taxation. This is because the amount of tax paid by a C corporation is based on the amount of its corporate income; this same income, which is distributed to shareholders as dividends, is also the basis of the amount of personal income tax that shareholders should pay.

However, though the pass-through taxation enjoyed under the S corp status means huge savings for shareholders, many corporations choose the C corp status instead due to the absence of restrictions, such as having multiple classes of stock.

An article posted in www.rrs-law.com states, “establishing a new company is an exciting move, however all decisions can have a substantial impact on the future of the business. From a legal standpoint, there are a range of different choices that must be made which can profoundly influence the course of a company’s development and progress. Advice from a qualified legal professional can prove invaluable, especially for entrepreneurs.”

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