An S corporation is a corporation which has elected to have its profits pass through to is shareholders in the same manner as a partnership or sole proprietorship.  The shareholders of an S corporation receive the benefit of limited liability, and are treated in the manner of partners for purposes of taxation.  An S corporation requires Articles of Incorporation be filed with the Secretary of State of Minnesota.  An S corporation issues stock and is governed as a corporation. The owners, referred to as shareholders, have the same protection from liability as shareholders of a C corporation. Shareholders in an S corporation have no personal liability for business liabilities. 
However, not all businesses qualify to be an S corporation.  To qualify as an S corporation, the corporation:

• May have no more than 75 shareholders, all of whom are individuals, estates, or qualifying trusts;

• Must have only one class of stock (although differences in voting rights may be allowed);

• Must be formed in the United States; and

• All shareholders must be citizens or residents of the United States. Non-resident aliens may not hold shares.

Advantages of Setting up Your Business as an S Corporation

• Limited Liability: The most significant advantages of converting a sole proprietorship or partnership to an S corporation are limited liability.  An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities of the corporation. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.

• Pass-through taxation: An S corporation does not pay federal taxes at the corporate level.  Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns.

• Losses: Corporate losses may ordinarily be passed through to the shareholders, who can then claim a deduction from their other taxable income.

• Tax-favorable characterization of income:  S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation.  A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.

• Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences.  The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.

• Ability to raise capital: Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.

• Easier Tax Accounting: tax accounting is easier for an S corporation than for a partnership or LLC.

Disadvantages of Setting up Your Business as an S Corporation

• Fewer investment opportunities: Unlike a C corporation, the S corporation may not be the subject of a public offering.

• No flexibility in allocation of profits: unlike an LLC, profits are allocated in proportion to each shareholder's ownership interest in the corporation.

• No deduction of fringe benefits: S corporations may not deduct the cost of fringe benefits granted to employees who have more than a 2% ownership interest in the corporation.

• Shareholder must be U.S. citizens or permanent residents:  Businesses who wish to seek foreign investors may be burdened by the residency restrictions on shareholders.

• Formation and ongoing expenses. S corporations have a higher cost of doing business that sole proprietorships and general partnership sue to recordkeeping and paperwork requirements by the state.

• Tax qualification obligations. Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status.

• Stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. Therefore, there can’t be different classes of investors who are entitled to different dividends or distribution rights.

C Corporations are a business entity that provides strong liability protection to their owners with a complete separate entity, making them advantageous to those seeking investors.  However, they are more costly and difficult in terms of regulation and paperwork.

Advantages of Setting up Your Business as a C Corporation.

• Liability protection: Because the C corporation is legally an entirely separate entity from the owners and shareholders, owners and shareholders cannot be held responsible for any debts of the C corporation or any lawsuits brought against it. In other words, your personal assets will not be affected by the actions of the corporation.

• Capital Investment: A C corporation can sell stock or shares, either common or preferred -- and there’s no limit to the number of shareholders. If you ever plan to go public, you’ll also need to be structured as a C corporation. In addition, the C corporation form allows you to offer employees a stock option plan.

• Taxes: Because the corporation is a separate entity, the profits and losses of the C corporation are retained for the corporation. Unless you or your shareholders receive dividends, you will not be taxed on the company’s income. Also in your favor, you can deduct business expenses and employee benefits in your tax filings.

• Lower tax rate: You also have the option of splitting profits and losses between the business and the owners to create an overall lower tax rate.

• Perpetual existence: A C corporation will exist indefinitely, even if a shareholder or owner leaves, becomes disabled, dies, or sells off their shares.

• Employment:  Allows shareholders to also serve as employees.

• Number of shareholders:  Unlike an S corporation, there is no limit on the number of shareholder and shares that may be held by people who are neither citizens nor residents of the United States.

• Tax Flexibility: Flexibility to carry corporate losses forward to future tax years.

Disadvantages of Setting up Your Business as a C Corporation

• Higher costs: Corporations pay a number of state and federal filing fees, and each state also has its own set of regulations. Dealing with these regulations may require the professional expense of an attorney or accountant.

• Increased paperwork: Increased regulations and complex rules require a corporation to file a number of documents, including Articles of Incorporation, corporate bylaws, corporate minutes, certificates of good standing, and more.

• Double taxation: Owners of the corporation pay a double tax on the earnings of the company, and shareholders must pay taxes on the dividends received. However, if the owners take a salary, the corporation is not required to pay tax on the earnings. The payments are considered a business expense.

• A Corporation cannot pass through losses to investors, as can an S corporation or LLC in Minnesota, a business owner can be held personally liable under certain circumstances.  This is called piercing the corporate veil.  Under Minn. State.Sec. 322b.303. piercing the corporate veil may occur if a business owner fails to keep business formalities, co-mingles funds or has inadequate capitalization to start the business. 
  Some of the paperwork required to create a C corporation includes a corporate charter, by-laws, establishing books and records, reports to the states as well as a board of directors meeting.   Because mistakes in these documents can create problems, you should contact us to consult before setting your business up as a C corporation.