If you have a small business corporation—one you formed or inherited—should it be S or C? What does this alphabet soup even mean?
Do you own, stand to receive as inheritance, or are just plain curious about how to start a business (especially if you have been downsized in this economy)? If yes, then you should read a recent article in Forbes explaining the differences between a “C” and an “S” corporation. It is titled “C or S Corporation Choice is Critical for Small Business.” In addition to this choice, there is the other type of incorporation, LLC (limited liability corporation), and the ins and outs of that option are detailed in a Wall Street Journal article titled “An Inspired Financing Choice for Artists and Patrons.
The differences between the S and C corporation are mostly about the tax code. The Articles of Incorporation filed for your business with the Secretary of State of the state where it is incorporated don’t specify whether the business is C or S. All corporations are by default C corporations (which means they are governed by subchapter C of the tax code). A corporation becomes an S corporation only upon deliberately filing for that status.
Regardless of whether it is S or C, a corporation provides limited liability, which is of course the point. It’s a separate legal entity from the individual, owned by shareholders and governed by a board of directors. Liability for any failure of performance is limited to the assets of the corporation itself rather than bleeding over to hit the assets of the individual (in most cases – there are some crucial exceptions which are outside our scope here). The choice of S or C status determines only how taxes are assessed against the corporation’s income, which can be significant for New York asset protection.
Which of these forms of entity structure is the right choice, or whether you should do neither and incorporate your business as an LLC instead, depends on your particular circumstances. The articles linked here provide some good information but only scratch the surface. The question ends up being very complicated and competent counsel should be retained, as usual for significant questions of NY estate planning.
Reference: Forbes (May 3, 2012) “C or S Corporation Choice is Critical for Small Business”
The Wall Street Journal (May 21, 2012) “An Inspired Financing Choice for Artists and Patrons”