Should we incorporate as an S corp or C corp?

Friday, October 19, 2007

Fred Greguras, Fenwick & West, http://www.fenwick.com/

“S corp” and “C corp” are tax statuses rather than a type of corporation you would form in California or Delaware. An S corporation is taxed like a partnership. Gains and losses flow through to the shareholders so it can provide tax advantages if, for example, there is a long product development period with significant expenses that would flow through to individual tax returns.

There are restrictions on the number (100) and types of shareholders in an S corp. Shareholders must be U.S. citizens or residents and natural persons not entities. Also, while you can make a decision at the end of a calendar year to switch to a C corp, you can’t decide to turn S corp status off when ever you want to do so. A preferred stock financing will terminate S corp status because an S corp may not have more than one class of shares outstanding.

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