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What are the differences between C-corps and S-corps?

On Behalf of | Feb 10, 2022 | Business Law |

Starting a business in the Austin area can be a very exciting time, but it can also be a very stressful and complicated. People may understand the specifics of the product or service they will be selling through the business. They may also have a number of clients or customers ready to go, but there is much more to starting a business besides the aspects people understand the best.

One of those aspects is that people need to set up a business structure for the business to help protect themselves and their assets from personal liability for the business. People have different options for business structures, but one common one people choose is a corporation. However, people may not know that there are different types of corporations. The main two that people will typically choose between are called C-corporations and S-corporations.

Basics of C-corporations

C-corporations (C-corps) will keep the business separate from the owners, who are the shareholders of the corporation. Shares of C-Corps can be bought and sold and the business generally runs separate from who actually owns the shares. This can be advantageous if the owners are raising capital for the company. C-corps are taxed separately based on the profits of the corporation and then the individual shareholders are taxed on the dividends they receive.

Basics of S-corporations

S-corporations (S-corps) are similar to C-corps in that there are shareholders and the corporation is a separate entity from the shareholders and owners. The main difference between a C-corp and S-corp is how it is taxed. S-corps are known as pass through entities. This means that the profits pass through to the owners and they pay taxes on their individual tax returns. There are also other eligibility criteria for S-corps.

Having the right business organization is important for new businesses in Texas. To choose the appropriate one people need to understand what each type of organization provides and also the goals of the company. Experienced attorneys understand what organization businesses may need and may be a useful resource as people start businesses.