Entrepreneurs looking to start a new business in Arizona need to know the difference between an S corporation and a C corporation.
When launching a new company in Tempe, many business people may be unsure of whether they should develop a C corporation or an S corporation. Which one is the better choice? Entrepreneur explains that there is no one-size-fits all answer to this question.
With both the S corporation and the C corporation operational model, shareholders and business owners are able to keep their personal assets shielded from lawsuits or creditors. Beyond that similarity, there are several differences in the two approaches.
A C Corporation Is The Recognized Default
According to Fox Business, the Internal Revenue Service assumes that any new corporation is a C corporation unless a special form is completed and filed. The IRS Form 2553 is required to establish an S corporation, in order to meet the federal requirements for this type of business model.
How Federal Taxes Are Handled
As outlined by the IRS, taxation for S and C corporations at the federal level is different. For a C corporation, taxes are calculated directly on the losses or profits of the business. For an S corporation, a flow-through model is adopted.
Under the flow-through taxation approach for S corporations, a business’ losses or profits are moved down to the shareholders.
Each shareholder is then responsible for paying personal income taxes based upon this information and any other personal income data. The corporations’ loss or profit value will impact the individual taxes of each shareholder. Depending upon the profitability of the business in a given year, this may contribute to an increase or a decrease in a what the shareholder owes.
How State Taxes Are Handled
From a state perspective, when it comes time to file income taxes, there are special requirements. The Arizona Department of Revenue indicates that an S corporation must file a Form 120S with its tax return. If a parent-subsidiary relationship exists where the subsidiary is an S corporation, it is the parent corporation that is required to file the income taxes.
Administrative Features Unique To Each Corporation Type
If a business is established as a C corporation, an accrual method for accounting is used. A business that is established as an S corporation may opt instead to operate on a cash basis. By making this election, a business may enjoy a simplified accounting process.
Generally, there are multiple types of stocks that may be issued by corporations. However, an S corporation is restricted to the use of common stock only, limiting the solicitation of future funding possibilities.
S corporations are also more restricted on who they may allow to be shareholders and where they may operate. Individuals are the most common form of shareholder with an S corporation but estates or trusts are also allowed. S corporations cannot issue stocks to non-resident aliens. The S corporation designation is for domestic companies only.
Recommendations For Starting A New Corporation
Before making a final decision about which type of business model to establish, entrepreneurs in Arizona should consult with an experienced corporate attorney. Doing so ensures that all legalities are properly thought through ahead of time so that the best choice is ultimately made.
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