For entrepreneurs choosing to pursue small business incorporation and form a corporate business structure to operate their business under, they have to consider what type of corporation to choose as each one has its own tax implications. During the small business incorporation process a business owner can choose either to have an S corp or a C corp, and the decision boils down to how taxes are handled. A business owner should consult with a qualified tax professional to get advice on what option to choose before they make a decision.
Small Business Trends recently wrote about if an S corp is the best choice for a small business and does an excellent job of outlining the tax consequences of choosing an S corp versus forming a C corporation. Since the IRS doesn’t allow you to flip-flop back and forth between the two different corporate structures as you see fit, you have to be darn sure to choose the right structure for your situation. Again, this is why you need to consult with a tax professional before choosing your corporate structure.
The key difference between a C corporation and an S corporation is how income taxes are handled. Every for-profit corporation starts out as a C corporation. A company (or rather, its owners) can elect to go with S corporation filing status by completing the necessary IRS form before the deadline as outlined by the IRS. Your accountant or business formation service can help you with the process and ensure that everything is handled in the appropriate time frame.
A C corporation suffers from what is called double taxation. The corporation itself has to pay income taxes at the corporate level, and then its owners have to pay at a personal level, thus the money made by the corporation is taxed twice. This is a far from ideal situation for most small companies, and is the main reason to not choose to remain as a C corporation.
An S corporation is a pass-through tax entity. In other words, there are no income taxes paid at the corporate level. Instead, profits are passed-through the company to its owners, who pay income tax at the personal level. With an S corporation setup, taxes are only paid once, which is the way that most small companies should be set up. Yes, there are reasons why a corporation would choose to remain a C corp, but for most smaller operations, the ideal situation is to elect to be an S corp. Again, consult with an accountant to ensure your corporation is (or will be) set up properly.
The nice thing about S corporation status is that those business owners choosing to form an LLC (Limited Liability Company) instead of a corporation can choose to be taxed as an S corporation, thus enjoying the pass-through taxation benefits.
Regardless of how you choose to form a corporation, you need to choose how taxes are handled (i.e., what type of corporation you will have). Whether you choose to use a lawyer to incorporate, or choose to use one of the (generally) lower cost business incorporation services that can be found online, you should be provided with the necessary steps to take if you wish to elect to become an S corporation. Any type of business incorporation service will either complete the S corp election form for you, or walk you through the process.
An online incorporation service is a cost effective way to form any type of corporation, ensuring that the necessary business formation paperwork is completed correctly and filed with the appropriate authorities. Most entrepreneurs just starting out are watching closely every dollar that flows out, and an online incorporation solution helps to reduce their business formation costs while handling the sometimes difficult task of completing the formation paperwork. Leave the dirty work to the experts and concentrate on what you do best – working with your customers!
If a business owner has decided it is time to incorporate they have one more decision to make – how to handle income taxes. Electing to be an S corporation is often times best, especially for smaller companies looking to minimize income tax. After consulting with an accountant, the S corp might just be the right choice for your new business entity.