Stock Types for C Corps vs S Corps: Some Basics

Stock Types for C Corps vs S Corps: Some Basics

Have you ever wondered how an investor can have ownership of companies he is investing in? Gary Vaynerchuk, for example, invests in numerous startups, which include Twitter, Disqus and Trippy.  How does he do it? Basically, he bought the company’s stocks that he feels have many upsides and potentials.

Sounds cool. However, before you embark in your business investing journey, you need to understand the basics.

This article can give you an overview on stocks. Read on to gain more insight.

Business financial report

Stocks 101

Stocks are shares of ownership in a company. This means that having stocks gives you partial ownership of a company.

Both S Corps and C Corps offer stocks. Each of these has number things in common as well as a number of things that are different.

There are two main types of stocks: common stocks and preferred stocks.

1. Common Stocks

The most common type of stock is common stocks. This is generally what people think of when they talk about stocks. Most stock that is available is this type of stock. There are common shares which show ownership of the company and allow for the shareholder to have a stake in the claim of the profit. The company is overseen by board members. Shareholders are able to vote for the board members based on the number of shares that they have.

Common stocks are the highest yielding investment over time. However common stocks have the most risk. Companies sometimes go bankrupt and if this happens the common shareholders are the last to get money back. The bondholders and then the preferred shareholders get paid first.

2. Preferred Stocks

A preferred stock allows you to have ownership in a company but does not allow you to vote in most cases. Some companies do allow for their preferred stockholders to vote. Each preferred share holder is given a specified dividend forever. Plus if the company goes bankrupt these stocks are paid back before the common stocks. The company is able to buy these shares back at any time. They do not have to have a reason either if they decide to buy these back.

Stock Class

There are different classes of stocks as well. Generally these different classes are labeled Class A and Class B. The classes allow companies to customize the stock options in any way that they feel would benefit the company.

So, what is the difference among the two? The difference is on your voting rights.  The class is differentiated into Class A and Class B to maintain control of the company ownership.  The company’s ‘founding fathers’ are obviously holding the stock class that offer them preferential voting rights (read: They are more influential in determining the future of the company.)

Business team

C Corps vs. S Corps

Your decision in choosing to get your business incorporated as a C Corp or S Corp is very important. So, what’s the difference among the two? The answer lies in tax obligations.

When you decide to formalize your business into an LLC, you are basically forming a C corporation (“C” refers to the sub-chapter of the tax code.)  You may file for “S” status later on.

But why would you want to file for S Corp status? Perhaps the main reason is this: Income from a C Corp is taxed twice.

Firstly, you are taxed on your net income. Secondly, shareholders are taxed on distributions.  On the other hand, an S Corp is only taxed once, and that is at the shareholder level.

Read this for more information about the difference.

C Corps Stocks

Having shares of a C Corps means that you can profit from the business, however, you are liable or responsible for taxation. In fact the corporation is actually taxed separately from the shareholders.

Here are different types of C Corps’ stocks:

  • Common Stock – Limiting the amount of common stock can help the company to be able to control how voting goes.
  • Cumulative Preferred Stock – These stocks have no voting rights but the corporation must continuously make payments to them.
  • Callable Preferred Stock – This type of stock allows the corporation to call back stocks on a certain date and reissue for lower rates.
  • Convertible Preferred Stock – Convertible stock keeps your shareholders from being able to own the stock forever.

Each one of these types of stocks can have different classes.

S Corps Stocks

Owning shares in S Corp stocks means that you are going to have to pay taxes on your shares. The corporation itself does not pay taxes because the taxes are being paid by the shareholders.

Here are different types of S Corps’ stocks:

  • Common Stock – The common stock allows for the shareholders to vote.
  • Preferred Stock – Preferred stocks do not allow the shareholders to vote most of the time but do have a regular payment that is sent (generally quarterly).

S Corps are not allowed to sell different classes of stocks.

Takeaway

Before you decide on anything, make sure you consult with fellow business owners for suggestions. Better yet, you should consult with your lawyer to help yo gain more insights on the pros/cons of a C corp and S Corp.

You also need to do your own due diligence. Search the web for more information. Searching social media sites such as Facebook can also help, as you can actually send a message to a law firm representative.

Ivan Widjaya

Ivan Widjaya is the Owner/Editor of Noobpreneur.com, as well as several other blogs. He is a business blogger, web publisher and content marketer for SMEs.