No. of Recommendations: 7
Without an awful lot more information, it's hard to even guess which choice might be better. Books have been written going deep into the subject. So it's hard to even summarize things into a single discussion board post.
One of the primary differences is that C corps are theoretically subject to double taxation, while an S Corp is not.
A C corp pays tax on its income, which can then be distributed to shareholders as dividends. The shareholders pay tax again on the dividends. An S corp avoids that double taxation. But it does so by making the shareholders pay tax on their portion of the corporation's income whether the income is distributed to the shareholder or not.
One wrinkle is that C corps often pay out the bulk of their profit to the shareholders as salary. This is only possible if the shareholders are actively involved in the business. In practice, most are - at least in smaller businesses. That negates much of the double taxation.
The usual game with S corps is avoidance of social security and/or medicare taxes on payroll. Pay a smaller salary (can't pay zero unless the shareholder is not involved in the day to day business at all) and let the income flow through as a shareholder rather than an employee. That income is not normally subject to social security or medicare taxes.
With a single shareholder, an S corp is easy to administer. The shareholder can decide how much of the corporate income to distribute and how much to retain in the corporation for future growth. Adding even a second shareholder makes things harder. The two shareholders now have to agree to some extent. Decisions will get made by majority vote - majority of the shares voted, not majority of the shareholders. Two or three people going into business together with a shared vision can usually come to agreement on such things. Multiple people dumped into a business via inheritance might not have that shared vision.
Frankly, one of the first decisions to make after an inheritance like this is whether to keep the business or to sell it. And there's good arguments for selling. Because the business was inherited, the basis of the shares gets adjusted to the current market value of the shares - which is going to be the value of the business (give or take a bit for majority or minority interests in the business). So the business could be sold with little or no income tax to pay.
That might be something to consider if the inheritors have not been involved with the business previously. Many 'family' businesses have been run into the ground after the founder passes away because the children don't know how to run the business.
--Peter
