Although traditional "C" corporations are frowned upon for small businesses, "S" corporations are viewed more favorably.
So, just what are "S" and "C" corporations? The technical answer is they different classifications of corporations from both a legal and tax aspect.
For instance, a "C" corporation can have as many shareholders as it can find while an "S" entity is limited to less than 75.
While there are plenty of technical legal issues, the "S" versus "C" choice tends to boil down to a tax question.
As with all tax questions, it is not a simple one per se.
One has to look at issues related to the initial finances of the corporation as well as where the entity will ultimately be positioned.
For instance, if the intention is to take a corporation public in a few years, one has to keep in mind a "C" corporation is the only version that can go public.
At the end of the day, a majority of businesses end up going with the "S" designation.
The "S" designation refers to sub-chapter S of the corresponding section of the tax code on corporate taxation.
As a general rule, a "S" corporation is treated similar to a partnership with the finances of the corporate entity passing through to the shareholders in the form of K-1 tax returns.
The shareholders then report the tax information on their personal returns.
Assuming you decide to form an "S" corporation, it is important to know the application process with the IRS can be a bit tricky.
The primary issue is the timing of the filing.
All and all, you want to file as soon as you have your normal EIN number.
If not, you fall into that strange world of IRS time ranges and periods.
Let's take a closer look.
The IRS has made the "S" designation form a mysterious one.
Filling out the form is fairly simple.
Filing it is not.
You must file the form within 2 ½ months of the beginning of the corporation's tax year.
If you do not, you must wait until the next year to do so.
Reading that restriction as any normal human being would, you might expect it to mean that only corporations filing the "S" designation before March 16th each year would be approved.
After all, January 1st is the first day of each tax year, right? As with many tax issues, this one is mystic, but not fatal.
What the instructions really mean is the tax year starts on the first day the corporation is formed, does businesses or pays a salary.
As such, a corporation formed on July 1st has until September 16th to file the "S" designation.
Filing for your "S" tax designation can be confusing.
The best way to avoid getting into a mess is to file it as soon as possible after the corporation is formed.
By taking this approach, you avoid all the timing issues.