Should You Incorporate Your Coaching Business?

Installment 2: Types of Corporations

There are two types of corporations: C and S (named for the sections of the Internal Revenue Code pertaining to each).

a) C Corporation. This is the "regular" or "typical" corporation. It has all of the features and requirements listed above. It files its own tax return and pays its own taxes. The shareholders only report any dividends (and wages, if any) that they receive from the corporation on their individual tax returns. Thus if you are the sole shareholder and only employee of your corporation, you will pay a double tax on part of the corporate income: corporate tax on net corporate income, and individual tax on the portion of corporate income paid to you as wages.

b) S Corporation. The S corporation is a mix, or hybrid, of the corporation and the partnership. It eliminates much of the "double tax" effect of the C corporation. The S corporation exhibits all of the characteristics and carries all of the requirements listed in the general description above, but it does not pay its own taxes. It files an annual informational return, but all net income or loss is distributed to the shareho­lders in proportion to their ownership, who then report it as income on their individual returns. Thus income to the C corporation is taxed at corporate tax rates (currently higher than individual rates), but income to the S corporation is taxed at the individual rates of the respective shareholders. Because the corporate tax rates are higher than individual rates, many C corporations have converted to S status, and many new businesses are choosing to be S corporations. To be treated as an S corporation, a special form electing S status must be filed with the IRS. Your accountant will be able to provide and assist you with that form, or you can locate it online at www.irs.gov.


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