What is an S Corporation and How it Differs from a Conventional C Corporation
A business structure known as the S corporation is more attractive to small-business owners than a conventional corporation which is also known as C Corporation. An S corporation has more tax benefits as compared to a conventional corporation. With an S Corporation the income and losses are passed through to the shareholders and included on their individual tax turns. This is similar to the kind of tax arrangement you find in a partnership. At the same time you enjoy the liability protection of a conventional Corporation by having a separate legal identity for the business.
In addition, owners of S corporation can use the cash method of accounting when they don’t have inventory which is simpler than the accrual method. Under this method income is taxable well-received and expenses are deductible when paid.
An S corporation is allowed to have up to 100 shareholders. This works to the benefit of a small business sense it makes it easier for the business owner to raise funding. This is an obvious advantage as compared to a partnership or a sole proprietorship. You can raise more capital, attract more investors with an S Corporation.
However there are some disadvantages to setting up an S corporation as well. The one major disadvantage is that many of the rules and regulations as well as the paperwork and let the documentation that is required for conventional C Corporation, applies to S corporation as well.
This means that the cost of setting up an S corporation is rather high as well. You will have to pay a higher fee to get legal advice as well as to maintain the legal and accounting system for the business. An S corporation is required to file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes and allow shareholders to vote on major business decisions.
Another major difference between a regular C Corporation and an S corporation is that S corporations can only issue one class of stock. This can hinder the company’s potential to raise funding to a certain degree.
Also, unlike a regular C Corporation, S corporation stock can be owned by individuals, estates and certain types of trusts.