Biz Startz ~> First Steps ~> (End of First Steps section)
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Increasing the Fleet — the S-Corporation
Arthur runs Intense Cheer Etc., an all-star
cheering academy that teachers kids of all ages cheerleading, spinning, jumps, and stances on the campus of
Wichita State University. Trusting the knowledge of a business mentor, he set up his company as an S-corporation.
"The liability risk was a huge factor in determining the structure of Intense Cheer," Arthur says. Since all-star cheering teams participate in maneuvers that other teams cannot do because of safety concerns, he was wise to consider the risks. With an S-corporation, Arthur and his shareholders stand a better chance of not losing personal assets if sued. "We limited a lot of liability by choosing an S-corporation," Arthur says. "I'm very satisfied with the choice."
On the other hand, corporations have much higher formation costs than sole proprietorships or partnerships. Arthur spend about $2,650 in attorney, accounting, and filing fees to obtain "S-corp" status.
In the eyes of the government, a corporation is an independent legal entity separate from it's owners. Corporations have to file articles of incorporation, elect a board of directors, hold directors' and shareholders' meetings, keep corporate minutes, and allow shareholders to vote on major decisions. Because corporations have to keep detailed financial record and follow numerous regulations, Arthur will also have to pay more for accounting and tax preparation every year.
Although an S-corporation is limited to having 75 shareholders, it offers important tax advantages. Income and losses from an S-corporation are passed through to shareholders, so Arthur pays taxes on his business earnings only once — on his individual income tax return. "there are some taxes we don't have to pay as an S-corporation," Arthur explains. "Already I see the benefits, and most of them are financial."
Sailing the High Seas — the C-Corporation
From his third-floor office overlooking
Daytona Beach, Jayson set his sights on distant horizons when choosing to classify Meyer Technologies, Inc. as a
C-corporation. "I looked at where I want to take the company, and that's how I made the decision," says Jayson.
"If I had wanted to stay small and privately run, I would have chosen an S-corporation. Since my goal is to go
public, I thought a C-corporation was the best way to go."
When a C-corporation goes public, the company raises money by selling stock to interested investors in the general public. Subsequently, investors can hold the stock they own and "hang on for the ride," or they can sell the stock to other investors through one of the national stock exchanges. Going public is a complicated and highly regulated process that requires the assistance of knowledgeable financial and legal professionals.
Liability also played a part in Jayson's decision to form a C-corporation for his business, which specializes in Web-based medical billing systems for physicians. "I'm a shareholder and president of the board of directors, but I have less personal liability as a C-corporation, and that's one aspect I looked at," he explains.
Since Jayson incorporated in May 2000, the company has continued to grow rapidly. Meyer Technologies now has 12 employees, and Jayson has freed himself from corporate paperwork by hiring an accountant. He is also laying the groundwork for taking the company public. "We want to grow and add additional board members," he says.
Some business owners don't like C-corporations because profits from the company are taxed twice — once on the corporate level, then again on individual shareholders' tax returns when they report salaries or dividends. Jayson, however, doesn't see this as a big problem. "I have a salary from the company and a profit-sharing plan," says Jayson. "I get taxed once personally, and the corporation gets taxed on the money it has."
"If I were still a sole proprietor, like I was when I started, I'd probably have more direct income," Jayson continues, "but my goals for the company are to continue building it. So far, being a C-corporation has benefited us greatly."