Before starting a new business, you should evaluate what type of business structure is best for your intended business and goals. Forming a corporate structure can help you minimize your potential personal liabilities, create a separate legal entity to establish your business’ brand, and build in tax advantages depending on how you elect to treat the corporation with the IRS.
Under Oregon law, the corporate structure is governed by statute regarding its formation, governance, and dissolution. It is a common and understandable misconception that corporations are formed as “S corporations” or “C corporations”. They are not. These classifications are tax classification for corporations under the Internal Revenue Code, which have important practical consequences and benefits depending on your business goals.
A very important distinction between a C corporation and an S corporation is based on tax considerations. In a C corporation, there are to levels of taxation- the corporate level and the shareholder (i.e. owner) level. In an S corporation, the profits and losses of the corporation pass through to its owners.
Another important distinction between a C corporation and an S corporation relates to the respective restrictions on ownership and stock classifications, with S corporation ownership restricted by the total number of owners and to U.S. residents and citizens and to single classes of stock. Consequently, C corporations may be a better fit for those looking to start a large public corporation, seeking to sell the corporation in the future, or who wish to obtain investment from non-U.S. residents or citizens. S corporations may be a better fit for smaller business owners who wish to minimize business and personal taxes and potentially be paid a salary from the business.
There are important deadlines to consider when making an S election after your corporation’s formation. If not done timely or correctly, your corporation will be considered a C corporation and taxed accordingly by the IRS. As a result, you should consult with competent tax and legal counsel early in your process to ensure you choose the right entity for you and comply with all legal requirements in a timely manner.