Here in part 3 of Making Your Home Business Legal I’ll explain the differences between a “S corporation” and a “C Corporation”. Make sure you check out Part 1 to understand the many state & federal regulations for legalizing your business and Part 2 for the pros and cons of the different types of ownership.
If you decide to classify your home business as a corporation you can go the traditional route of a C corporation; or you can classify your home business as a S corporation. Small businesses usually chose the S corp.
Whats the difference between a S corporation and a C corp?
They are very similar except in the way of taxation. With the S corp the profits and losses are passed through the corporation onto you, the owner. You in turn report the profits or losses on your income tax returns.
With the C corp the Corporation will pay taxes on its profits and then the owners or shareholders (you) will report money received from the corporation (in the form of salary or dividends) on your income tax returns.
So which is better for your home business, an S corp or a C corp?
That depends. Some states don’t recognize S corps and some states will tax an S corp just like a C corp. So you must do your homework.
And get advice from a business law attorney. And preferably one who has experience dealing with small businesses. (I always tell my clients to niche themselves and here is a perfect example beneficial that could be for you. People with a small niche seem to know more about their clients needs.)
In what state should you incorporate?
Since the 1920’s Delaware has been a popular state to incorporate. I remember with my first incorporated business I choose Delaware. I didn’t know why or how it benefited me. Duh! It didn’t. It’s best to incorporate your business in your home state. The reason that Delaware has been so popular as an incorporating state is:
- It often revises it’s corporate laws.
- The legal system is very attentive to corporations. Delaware has a special court, called the Court of Chancery. On the benches sit judges who were former corporate lawyers. Their expertise tends to be beneficial for the corporations that find themselves in a lawsuit.
- There is no income tax on corporations that are organized in Delaware but do business in another state.
All 3 of these points are advantageous for large corporations, not home business. Incorporate in your own state.
(Now Nevada and Wyoming are becoming popular places to incorporate because they have no corporate or personal income tax and they don’t share information with the IRS.)