Incorporating Facts

Picking the right business structure is one of the first keys to success

legal entity formed under state law that has authority to act in a manner that is distinct and independent of its shareholders. A C-corporation is subject to U.S. federal income taxation at the entity level — the income or losses of a C-corporation do not flow through to shareholders.

Pros: A good way to shield yourself from financial and legal liability. Owner enjoys limited liability for business debts and fringe benefits are deductible as business expenses.

Cons: Active owner must be paid as an employee, C-Corps cost more to set up and file taxes for, and losses are deductible by the corporation only. There’s also the potential for double taxation (when the corporation is taxed and dividends of remaining profits are taxed again when distributed to owners).

S-Corporation: This is basically a C-corporation that has elected a special tax treatment with the IRS. While C-corporations pay corporate income tax on the profits they generate, taxes are deducted from the individual stockholders of the S-corporation.

Pros: Personal assets will not be at risk because of the activities or liabilities of the S-corporation. S-corporations generally do not have to pay corporate-level income tax. Instead, the corporation’s gains, losses, deductions, and credits are passed through to the principal owners and shareholders and are claimed on individual returns.

Cons: S-corporations cannot have more than 75 shareholders and corporations. And nonresident aliens, and most estates and trusts, cannot be shareholders.

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