Wondering how to structure your company? Which type of corporation has the best asset protection value? There are two types of corporations, C corporations and S corporations. The S corporations are usually used by the “little guys,” and the C corporations are always used by the “big guys.” It you are selling stock to a significant number of shareholders, you have to use a C corporation. S corporations are restricted to no more than 100 shareholders who are basically warm blooded American citizens.
In a business incorporation it is good to know that the asset protection value of a C and an S corporation is identical, because the corporate documents are identical. The requirements for maintenance of the corporations are basically identical. The only difference in the corporations is the election filed with the IRS to have the corporation taxed under Chapter 1, Subchapter S or Subchapter C, of the IRS Code.
There is a perception that C corporations give better asset protection. That is because they are the business incorporation structure the big boys use. They work well for these boys because they can afford to pay the big bucks to have the attorneys do all of the maintenance to keep the corporate formalities up to snuff. This is important because when there is a legal challenge, the corporate veil holds. The little guys often forget or ignore the corporate formalities. This is why and they lose the corporate shield 95% of the time when it is challenged in court.
In the Business Planning portion of the Accumulation and Preservation of Wealth, I hit the corporate formalities hard and teach you how to do them yourself, because unless you’re one of the big boys, you can’t afford to have the attorneys do it for you. You have to do it yourself.
The tax aspects of the corporations are very different. But, that is an accounting question, not a legal question. Get your accountant involved in that decision. Having said that, unless you are going to have lots of shareholders, your accountant or attorney had better have some really good reasons to recommend a C corporation to you. There aren’t a lot of really good reasons, so be careful.