When starting a business in New Jersey, you need to decide on the right legal entity. Each structure has advantages and disadvantages to consider when making this important choice.
Two common options for businesses are C corporations and S corporations.
Characteristics of a C corporation
A C corporation or C corp is a standard corporate structure that is separate from its owners. This structure gives shareholders limited liability protection. Their personal assets are generally shielded from business debts and liabilities.
As a separate tax entity from its owners, C corporations must pay corporate income tax. However, they can reduce liability by reinvesting profits. This business structure can also raise capital by issuing stock.
C corporations can have an unlimited number of shareholders, making it a smart choice for businesses with many investors. This structure also imposes few ownership restrictions, which is useful if you have shareholders outside the U.S.
An S corporation, or S corp, offers certain tax benefits and limited liability protection. Shareholders can use this structure to protect their personal property.
Unlike C corps, S corps do not pay federal income tax at the corporate level. Instead, profits and losses “pass through” to the shareholders’ individual tax returns. Many businesses find this strategy creates tax savings.
S corporations have stricter ownership requirements than C corporations. They can have no more than 100 shareholders. Those shareholders must be U.S. citizens or legal residents.
Choosing between a C corp and an S corp for your business depends on your long-term goals, number of shareholders and tax considerations. When you decide, you can register your business online in New Jersey for a $125 fee.