There will come a time when you decide to incorporate your business.  Doing so will change how the business is taxed and will provide you (along with other owners) with certain protections. But now that you’ve decided to incorporate, you will face another decision: Should you go with a standard C Corp, or opt for a more specialized S Corp?

Both C Corps and S Corps share some common characteristics:

The Corporation is a separate entity. Because a C Corp or S Corp is considered its own legal entity, you essentially separate yourself and your personal finances from the business. 

Protection from personal liability. In the event of a liability lawsuit, corporations shield their owners’ personal assets from liability. Your business can still be sued and required to pay damages, but assets that you own as an individual cannot be touched.

Business structure. As far as the business structure goes, there will be no difference between a C Corp and an S Corp. You will establish a board of directors and follow standard corporate formalities, such as holding shareholder meetings and issuing stocks.

The establishment process. Whether you choose a C Corp or S Corp, you will file the same documents and go through the same process. Therefore, one is not more difficult to establish than the other.

Because the S Corporation is taxed differently, it is the more appropriate choice in some situations. The two different styles of corporation are differentiated as follows.

Under a C Corp, the owner is paid a salary. The business itself is taxed, and the owner is taxed on their personal income from the business. Some people view this as being “doubly taxed”, and it might not be the right choice for your business.

With an S Corp, all profits and losses are reported on the owner’s personal tax return. Then one tax bill is paid. This is known as “pass-through” taxation. These types of corporations are subject to certain limits, such as offering only one class of stock and allowing no more than 100 shareholders.

Ultimately, the essential difference between a C Corp and an S Corp comes down to how they are taxed. But because other rules apply, and because tax situations vary, this is a decision to make carefully under experienced guidance. Call our business planning attorneys for more information.

Need Assistance?

We understand that incorporating your business in California may seem overwhelming at this point.  Schedule a business strategy session with our team of legal experts and we’ll help you get it done efficiently and effectively!

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