Louisiana C Corp or S Corp: Which Is Good For You?

The decisions that you make at the early stages of forming a business can have a long-lasting impact on your company. One of the most crucial factors you have to consider is the business entity structure.

With the various ways to structure a Louisiana business, choosing the one that best fits your company can seem difficult. You have to weigh the pros and cons of each option to find out which one is suitable for your circumstances.

Louisiana C Corp and S Corp

Two of the options that a lot of people get confused about are the C Corporation (C-Corp) and S Corporation (S-Corp).

• C-Corp – Generally, this structure refers to the corporations that most people know. If you choose this, your company will be treated as a separate legal entity. It can enter into contracts, purchase or sell properties, file a lawsuit, and get sued. The owners of the company are called shareholders, and they elect the members of the Board of Directors that will manage the business.The shareholders get to enjoy limited liability protection. So, even if the corporation ends up incurring debts and liabilities, it will not affect the personal assets of the owners.The profits of the company get taxed at a corporate level. At the same time, the money that the shareholders receive from the company is also taxed.
• S-Corp – What you need to understand is that the S Corporation is not a legal structure. It is a sub-category for taxation purposes. In this case, the owners of the company can elect for pass-through taxation.However, unlike a limited liability company (LLC), the S-Corp status is less flexible and has certain requirements. There are restrictions as to the number of shareholders and stock issuances, among others.

Differences Between Louisiana C Corp and S Corp

So, which of these two is good for you? To help you weigh your options, here are the major differences between the two:

Federal Taxation

A C-Corp is a separate entity. So, it has to report profits and losses and submit a corporate tax return. The shareholders will report and pay taxes only on the income that they get from the company. If your corporation decides to pass along any after-tax profits to its shareholders as dividends, the shareholders have to report these as income even though the corporation has already paid corporate taxes. That is what double taxation means.

Meanwhile, electing S-Corp status will give your company an advantage in case your company experiences losses. Unlike owners of C-Corps, S-Corps shareholders can offset other income by including their shares of the company’s losses on their individual tax returns. But, you have to keep in mind that you cannot deduct losses in excess of your basis in the business.

For instance, one shareholder invested $10,000 for the starting capital of the company. Then, the S Corporation ends up incurring a $15,000 worth of losses in its first year of operation. You can directly pass the $15,000 loss so that it will be reported on that shareholder’s personal tax return. However, the said shareholder can only use up to $10,000 of the total loss to offset their personal income. That is because their $10,000 investment is the full extent of their basis in the entity.

• State Taxation
  • C-Corps
    • The state normally audits corporations less frequently than partnerships and sole proprietorships.
    • C-Corps in the state file tax returns and pay income taxes.
    • Shareholders face double taxation.
    • C-Corps can reduce the self-employment taxes of the owners.
  • S-Corps
    • The state normally audits corporations less frequently than partnerships and sole proprietorships.
    • S-Corps are treated as pass-through entities when it comes to taxation.
    • S-Corps in the state file informational tax returns. But, they do not pay income taxes.
    • Shareholders report their shares of profits and losses on their individual tax returns.
    • The allocation of income and losses depend on the percentage of ownership.
    • The self-employment taxes of the owners are not applicable to the salaries that the corporation pays them.
• Owners and Employees
  • C-Corps
    • The owners who work for their Louisiana C-Corporation are considered employees. So, they are eligible for certain benefits like retirement plans, group insurance, and bonuses.
    • C-Corps can provide benefits that are deductible by the company and are tax-free.
  • S-Corps
    • Owners who work for the company are seen as employees. So, they are eligible for benefits like retirement plans, group insurance, and bonuses.
    • S-Corps can provide benefits that are deductible by the company and are tax-free. However, it may not be applicable for shareholders with more than 2% of the company’s stock.
• Stock
  • C-Corps
    • A C Corporation is authorized to have more than one class of stock.
  • S-Corps
    • S Corporations can only have one class of stock.
    • All shareholders of an S Corporation have to be a U.S. citizen or resident.

Business Activity

There are restrictions when it comes to the kind of business that S Corporations in Louisiana can do. Here are some businesses that cannot elect S-Corp status:

• Bank
• Insurance Company taxed under Subchapter L
• Domestic International Sales Corporation
• Certain Affiliated Groups of Corporations

Size

• C-Corps
  • When it comes to the size of the business, C-Corps have more flexibility compared to S-Corps. So, it may be a better choice if you plan on forming a large company with a lot of shareholders. That is especially beneficial for public-traded corporations.
• S-Corps
  • S Corporations cannot have more than 100 shareholders at a time

Fiscal Year

• C-Corps
  • Generally, a C-Corp can decide on the end of its fiscal year.
• S-Corps
  • Unlike C-Corps, the end of the fiscal year of an S-Corp has to be December 31.

Similarities Between Louisiana C Corp and S Corp

Despite the differences, C-Corps and S-Corps share some similar characteristics. Here are some of them:

• Both are treated as separate legal entities.
• Entrepreneurs cannot start a company as an S-Corp. But, you may start as a C-Corp before electing S Corporation status. In such cases, you will have to incorporate your company first.
• Both have perpetual life by default. So, the company will not end even if a shareholder passes away.
• C-Corps and S-Corps have similar makeup.
  • Shareholders – These are the owners of the company.
  • Directors – These are elected by shareholders. The directors are in charge of making management decisions.
  • Officers – These can either be elected or appointed by the board of directors. The officers are responsible for managing the day-to-day operations.
• Both offer limited liability protection for owners so they are not held responsible for any debts and obligations of the company.
• Transferring of ownership is through the sales of shares of the corporation’s stock.
• Raising additional capital is done through stock selling.
• Both have to comply with state obligations.

Incorporating a Louisiana Business

• Choosing a Business Name – The first thing you have to do to form a business in Louisiana is to think of a suitable name for your company. Make sure it follows the naming guidelines of the state.
• Appointing an Agent for Service of Process – All companies in Louisiana need a registered agent. They will be responsible for accepting legal correspondence and other business mail on behalf of your company. Learn more about the requirements through this article.
• Filing Formal Paperwork – You have to register your company with the Commercial Division of the Secretary of State. Make sure you use the appropriate form and pay the corresponding fee. For corporations, it is the Articles of Incorporation form. It costs $75.
• Filing the Initial Report – The state requires the submission of a Supplemental Initial Report.
• Creating Bylaws and Appointing Directors – After filing the paperwork, you have to hold the company’s initial corporate meeting. All the initial directors stated on the Articles of Incorporation have to attend. The directors will elect officers and define their roles. They will also be in charge of drafting the bylaws of the corporation.
• Issuing Stock – During the corporate meeting, the directors have to issue stock. They should also start maintaining a stock ledger.
• Getting an Employer Identification Number (EIN) – You have to acquire an EIN from the Internal Revenue Service (IRS). It will be necessary for opening a business bank account, hiring employees, and filing taxes.
• Electing S Corporation – If you want to elect S-Corp status, you will have to file Form 2553 with the IRS.

No matter what structure and tax treatment you choose for your Louisiana company, you will have to go through the registration process. If you need someone to handle it for you, contact DoMyLLC.