Most people starting out with their new business are going to have their hands full, simply thinking about whether incorporating is right for them. When they learn there are multiple kinds of corporations, they can start to feel overwhelmed. However, it’s not quite so complicated as it first appears, and there are just a few basic things you need to keep in mind if you’re deciding on how you want to incorporate your business.
The two primary forms of corporations are the S-Corp and the C-Corp, named after the provisions of the tax code that govern them. C-Corps are the more conventional form of corporations, and all corporations start as C-Corps, only becoming S-Corps by applying to the IRS for special S-Corp status. C-Corps are operated as separate entities from their shareholders or board members and are taxed at the corporate tax rate. Meanwhile, S-Corps are “pass-through” entities where the profits pass through the corporation to its shareholders, meaning that they are taxed at a different rate than C-Corps. Often, the tax rates of S-Corps are more favorable than those of C-Corps, avoiding what is known as the “double taxation” of corporate income, but S-Corps have certain restrictions that C-Corps do not.
For example, S-Corps cannot have more than 100 shareholders at a given time, and there can only be one class of stock issued (in other words, you can’t have stock with different privileges or benefits, such as stock that lacks the right to vote at shareholder meetings). These shareholders also must all be US citizens, and they must be natural persons; in other words, LLCs, trusts, and other corporations cannot be shareholders of an S-Corp. If any of these restrictions are violated, S-Corp status will be denied, and they will become a C-Corp by default.
Deciding how to incorporate your business can be confusing, and you should contact an attorney with knowledge of all areas of business law to help you make the best business decisions for you. The business attorneys at Blodnick, Fazio & Clark have the experience you need to make your business successful. If you want assistance in incorporating your business, or you’re interested in learning more about the benefits of incorporation, please call our Nassau County business lawyers at (516) 280-7105, or, for our Suffolk County business lawyers, call (631) 669-6300.