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SETTING UP YOUR RESTAURANT BUSINESS - C CORP vs. S CORP

Jun 19, 2013
Article #76
Author: Michael W. Pearson

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Due to California's "gross receipts" tax on limited liability companies, if your business involves selling goods you should consider forming a corporation rather than an LLC, but once you make that decision you must resolve whether to elect to be taxed as an S corporation or allow the corporation to be taxed as a C corporation.   Rather than flip a coin to decide, there are a list of considerations that weigh in favor of each of the tax structures.  

As a general matter, C corporations suffer from fewer limitations than S corporations with regard to share ownership and structure.  C corporations are preferred where venture capital may be sought because they can issue convertible preferred stock, the typical vehicle for a venture capital and angel investment.  S corporations may have a single class of stock only and therefore cannot issue preferred stock.  C corporations are not limited with respect to ownership participation. There is no limit on the type or number of shareholders a C corporation may have. S corporations, in contrast, can only have 100 shareholders, generally cannot have non-individual shareholders (for example other corporations and limited liability companies), and cannot have foreign shareholders (all shareholders must be U.S. residents or citizens).

The greatest benefit to S corporation status is the single level of tax.  S corporations pass their income through to their shareholders and the entity, generally, is not subject to income tax (note that California does have a 1.5% tax on S corporation income). A C corporation's income is taxable at the corporate level and distributions of earnings and profits to shareholders (i.e., dividends) that have already been taxed at the C corporation level are also taxable to the shareholders (i.e., the dividends are effectively taxed twice). This rule is also generally applicable on liquidation of the entity.

Many of the draw backs of S corporations relate directly to their status as a pass-through tax entity.  Because an S corporation's income passes through to its shareholders, C corporations are not subject to pressure from their shareholders to distribute cash to pay the tax liabilities that arise due to income passing through from the corporation.  An S corporation's pass-through taxation may make conservation and reinvestment of operating capital difficult because S corporations typically must distribute cash to enable shareholders to pay the taxes on their pro rata portion of the S corporation's income (S corporation shareholders are taxed on the income of the corporation regardless of whether any cash is distributed to them).  S corporations can also give rise to state tax issues and may even force shareholders to file returns in each state in which the S corporation does business.

If you have any questions about this article or any other corporate and tax matters, please do not hesitate to contact Michael Pearson.  If you enjoyed this article or found it informative please do not hesitate to forward it or share it with your friends and colleagues.

                                                                                                                                                                                                                                                       

We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions. 

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University.  Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions. 


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