C Corp vs S Corp: What's the difference?

The big difference is taxation. C corp profits are taxed at both the corporate and the shareholder level. S corps are not taxed; individual shareholders are taxed. An S corp lets you take advantage of the limited liability offered to a corporate shareholder but pay income taxes as a sole proprietor. This might be more advantageous in your case if you were the only investor or if you were in a partnership looking to limit your liability.

Not every company can be an S corp. For instance, S corps can have no more than 100 shareholders, which doesn't sound like it is an issue in your case -- but, as Jim points out, you need to take into consideration where your company will be five years down the line. Shareholders can't be non-resident aliens, so if you have an aunt in France who is among your investors, you're out of luck. Also, some types of companies are ineligible -- some financial and insurance companies, for instance.

Jim makes the most important point of all. Check with your CPA or tax attorney before making this important decision.

Here are some good resources:
http://www.irs.gov/businesses/small/article/0,,id=98359,00.html
http://www.sba.gov/smallbusinessplanner/start/chooseastructure/index.html

If you're becoming a sole proprietor, do you have to pick an S corp or C corp? Or are there other options?

Many people start their companies as sole proprietorships from the get-go, as it seems you, Ralph, did. As companies grow or change -- in his case, getting investors who require shares in the company -- a sole proprietorship may no longer fit the bill.

There are six basic company structures:

* Sole proprietorships
* General partnerships
* Limited partnerships
* C corporations
* S corporations
* LLCs (limited liability companies)

In a sole proprietorship, you own the company and are personally responsible for its assets and liabilities. And you are taxed as an individual.

A general partnership is owned by more than one party, each of whom assumes equal responsibility for assets and liabilities. And each party is taxed on an individual level.

In a limited partnership, one owner acts as a general partner, with other owners taking less profit and assuming fewer liabilities. Like a general partnership, owners are taxed on an individual level.

C and S corporations protect the owner(s) from any personal liability. And as mentioned above, C corporations are taxed twice, whereas S corporations pass the taxes on to shareholders.

Lastly, a limited liability company (LLC) can limit the owners' liability, but owners are taxed on a personal level like a general corporation or sole proprietorship.

Check out the resources above for more information. Check with your state's Secretary of State's office to determine special filing requirements for your state. And, again, as Jim mentioned, check with a CPA or tax attorney before making any decisions.