As you start your new business, one of the first decisions you will need to put into writing is the business entity you wish to use. Today's entrepreneurs have a variety of choices ranging from sole proprietorships that are legally tied to the business owner to hybrid structures to full-on corporations. For many new people starting out on this road, incorporating their company as a separate entity provides the risk protection they need and still allows full profit potential. But you will need to choose between forming an S corporation and a C corporation. Which is right for you? Here are some ways they are interchangeable and a few important differences. How an S Corporation and C Corporation Are Alike In many ways, these two corporate entities are treated alike. They both offer risk protection that separates the shareholders (partial owners) from the business and limits shareholders' responsibility for corporate debts and obligations. In both structures, you can receive money either from the earnings and profits of the business or as an employee of it. The legal filing responsibilities of both corporations are similar as well. You would need to file incorporation paperwork with state agencies and file additional documentation each year. The structures of management and oversight are also the same, involving directors, a board, and shareholder-elected officers to do the daily managing tasks. How an S Corporation and C Corporation Are Different So, with all these similarities, what are the reasons to choose one type or the other? Basically, these differences fall into two categories: flexibility and taxation. S corporations are more strictly limited by rules. They cannot have more than 100 shareholders , all shareholders must be U.S. citizens (and no C corporations), and they can only have one class of stock. C corporations are not so limited. If you plan to grow your business to a large scale, you may eventually find these limits too restrictive. They may interfere with your ability to raise capital — particularly venture capital — and look for shareholders in creative places. The other primary difference is taxation. C corporations file their own income tax return (Form 1120) annually and pay income taxes. Distributions are generally paid as dividends and are taxed as income of the shareholders who benefit from them. This is known as double taxation, and it can be a drain on small businesses who have only a handful or less of shareholders. S corporations are what is known as a pass-through entity. Like sole proprietorships and limited liability companies, S corps don't pay income tax at the business level. Instead, as with partnerships, profits are distributed to the owners who pay income tax on that personal income. This eliminates double taxation and frees up more money for the corporation to use for growth. A pass-through entity distributes all profits to its ownership, whereas a corporation can keep those profits for future use. If you plan to reinvest much of the profits of your company for the foreseeable future, a C corporation allows you to do this without increasing your personal income taxes. You can still be paid for your work as an employee. What You Should Keep In Mind A C corporation status is the default entity for tax purposes, but you can always change to an S corporation structure at a later date. The business keeps this designation only as long as everyone agrees and it meets the rules. You can also change to a C corporation if you find that the rules would be more beneficial. Whether you're still deciding on the initial business structure or your company may benefit from changing structures, work with a qualified business attorney in your area. At Donald B. Linsky & Associate PA , we can help. Our experienced business legal team can guide you through the choices and help you pick the entity that will bring the most profits and stability. Call today to make an appointment.