Business regulations are different depending on which state you reside in, which is why it’s important to know the difference between an Arizona C Corporation and an Arizona S Corporation. Many people believe that Arizona only allows a business to be elected as an S Corporation upon their original formation, but this is inaccurate. Your company will remain a C Corporation unless all consent is received through filling out Form 2553, which implies that all shareholders of the company are approving the action of becoming an S Corporation. However, doing this will change your income taxes, federally and by state, depending on where your company is established. The classification of your business will apply different limits and possibilities, which can make or break your company based on what you are trying to achieve.
Federal & State Differences Between an Arizona C Corporation & an Arizona S Corporation
One of the biggest concerns you may have about switching your company from an Arizona C Corporation to an Arizona S Corporation is that your business will be treated differently in federal or state tax terms. In most cases, Arizona C Corporations benefit more on both federal and state levels. If you own a C Corporation, federally you will be taxed as a separate entity and will report your profits and losses on a corporate tax return, and you will pay corporate taxes on those profits you make while your shareholders are not taxed whatsoever. C Corporation shareholders report and pay their income taxes only on what they are paid by the corporation.
On the other hand, S Corporations avoid federal double-taxation and their shareholders include their share of the corporation’s profits on their personal tax returns, meaning that the corporation itself does not pay business income taxes. However, the main issues that S Corporations face that C Corporations don’t is that many states do not recognize the “S” class Corporations by their classifications. Therefore, if you are planning to expand your business, then an S Corporation may make zero difference on your taxable income and company capabilities depending on what states you expand to.
Ownership & Accounting Differences
This is something that will impact the number of shareholders that own your business and how many employees your company has employed. For instance, Arizona C Corporations are much more likely to receive tax-free status on fringe benefits for their shareholders than Arizona S Corporations are. This is why C Corporations are the best option for public traded companies with lots of shareholders. C Corporations can also have multiple classes of stock whereas S Corporations can only have one class of stock.
Other ownership benefits for Arizona C Corporations is that they can choose when their fiscal year ends, unlike S Corporations that must end on December 31st each year. A business’s accounting methods are also affected by these classifications. Such as, if your company is not considered a “small” C Corporation, then you’re required to use the accrual method of accounting. For S Corporations, only those who have inventory must use the accrual method of accounting, however they cannot generally accumulate capital as effectively as C Corporations. Ultimately, S Corporation benefits its owners and shareholders more than C Corporations, but C Corporations have much more flexible options when it comes to finances.
Similarities Between C Corporations and S Corporations
While there are several contrasting components between Arizona C Corporations and Arizona S Corporations, they also share many similarities that may help you decide which would be better for your business. Some of these similarities include that both continue to exist even after the death of the owners and both provide limited liability protection for shareholders. Shareholders for both types of corporations have to pay personal income tax on any salary drawn from the corporation. They can also both provide employee benefits that are deductible by the corporation and tax-free to the employees. Lastly, both must comply with state requirements regarding the operation and organization of corporations.
Help Your Business Grow
Choosing between making your business an Arizona S Corporation or Arizona C Corporation can be a tricky decision depending on the size of your company and what type of business you conduct. Once you’ve made a decision, you also have to make sure that your company is in compliance with all the current AZ business regulations, like the Arizona new hire reporting requirements. PayTech can help you grow your business in the right direction by assisting you in things like HR support, payroll, and accounting and tax services. This way you are not set back for any mistakes your company makes during the transition of classification. If you’re interested in learning more about how PayTech makes running a business smoother, contact one of our friendly team members at 602.892.4796.