For entrepreneurs who are setting up new businesses in California, one decision they must make is what type of management structure they wish to use. There are a variety of options from sole proprietorships to corporations. When it comes to a corporation, there are two forms that must be reviewed: the traditional C corporation and the S corporation.
As explained by the Houston Chronicle, C corporations offer greater flexibility in some key areas. For starters, only individuals are allowed to invest in S corporations, not other businesses. Investors of these corporations must also be either U.S. citizens or permanent residents of the U.S. Businesses who are interested in seeking foreign investors will not wish to create an S corporation. Only one type of stock is able to be offered with an S corporation and the shareholders are limited to a maximum of 100.
Taxes are another big area of difference between S corporations and C corporations. For a while the former was considered the preferred option from a tax perspective but the introduction of the new tax code has changed that for many businesses. S corporations do not pay taxes but their shareholders must claim all income on their personal tax returns. This makes the tax rate quite a bit higher than for C corporations for some shareholders who are in high tax brackets.
According to Inc. magazine, C corporations have no cap on the losses they may claim but S corporations do have limits placed on them when it comes to claiming business losses.