Starting a new business comes with many decisions, one of the most critical being the choice of business structure. In New Jersey, many entrepreneurs decide between an S corporation (S corp) and a C corporation (C corp). Each offers distinct advantages and drawbacks, impacting everything from taxes to personal liability.
Key differences between S corps and C corps
When choosing between an S corp and a C corp, it’s essential to understand their unique characteristics. For taxation, an S corp benefits from pass-through taxation, meaning profits and losses appear on personal tax returns, thus avoiding double taxation. In contrast, a C corp experiences double taxation, where the corporation pays taxes on profits, and shareholders also pay taxes on dividends.
Regarding ownership restrictions, an S corp limits its shareholders to 100, who must be U.S. citizens or residents. A C corp faces no such restrictions on the number or type of shareholders. Stock options also differ; an S corp allows only one class of stock, while a C corp permits multiple classes, offering more flexibility in raising capital. Both S corps and C corps must adhere to corporate formalities like holding annual meetings and maintaining minutes.
Weighing your options
Choosing between an S corp and a C corp significantly impacts your new business. Assess your business goals, investment needs, and long-term plans to determine the best structure for your New Jersey-based business. Consulting with a business advisor or legal expert can also provide valuable insights tailored to your specific situation.