Benefits of S Corp vs C Corp: Everything You Need to Know
Benefits of S corp vs C corp include tax advantages like the avoidance of double taxation and the ability to allocate profits and distributions to shareholders.3 min read
What Is an S Corporation?
Your C corporation or LLC can choose to be taxed as an S corporation, which means that the business is not taxed at the corporate level. An S corp is a pass-through entity, which means that profits and losses are reported on the individual tax returns of each owner or shareholder. This avoids the double taxation that impacts C corporations, where profits are taxed on both the individual and corporate levels.
To be eligible for S corp tax treatment, a business must:
- Have 100 or fewer shareholders
- Have only U.S. citizens and resident aliens as shareholders
- Issue only one stock class
- Not be owned by trusts, partnerships, or other corporations
A qualifying corporation or LLC can file Form 2553 by March 15 of the tax year in question to be taxed as an S corporation. If the company does not operate on a calendar year, this form must be filed by the 15th day of the third month of the designated fiscal year.
Most who opt to form an S corporation do so to enjoy the tax advantages of this business entity. Although an S corp does not pay tax at the corporate level, it must file Form 1120S as an informational tax return each year. Individuals are taxed on their percentage share and may be taxed on the cost of their fringe benefits if they own more than 2 percent of the S corp stock.
Like a C corporation, an S corporation is owned by shareholders, who also are responsible for high-level decision-making. They appoint a board of directors and executive officers who manage the direction and daily activities of the corporation.
As with a C corp, an S corp must file articles of incorporation, issue stock, pay registration and other fees, and hold official shareholder and director meetings. S corporations must only issue one class of stock, with no hierarchy between different types of shareholders. Equal voting rights are conferred to all shareholders.
The tax advantages of an S corporation are especially beneficial for new businesses that may initially be operating at a loss. They can also write off business losses on the owners' individual tax returns. If you opt to file taxes as an S corporation, you must fulfill all requirements or risk losing this status and being subject to double taxation.
What Is a C Corporation?
A C corporation is subject to both corporate and individual income tax. This means that profits are taxed at the corporate level when earned and at the individual level when distributed to shareholders. For this reason, many small businesses prefer to form an S corporation for the tax break.
Unlike an S corp, a C corp can offer several classes of stock and has more flexibility when it comes to selling ownership stakes. A C corporation can also deduct the cost of employee benefits such as life, health, and disability insurance. These costs are not taxed for the shareholder as long as the same benefits are offered to at least 70 percent of the corporation's employees.
C corporations are not subject to the ownership restrictions of an S corp. However, all shareholders do enjoy limited liability protection. A C corporation can be owned by an individual, a trust, or another corporation or LLC. Foreign shareholders are allowed, and there is no limit to the total number of shareholders. Separate voting rights can be conferred to different classes of shareholders.
It may be easier for a C corp to attract investors than an S corp because the former can release unlimited shares of different classes of stock. If you eventually want your company to be acquired by another company or to go public, a C corporation is likely the best entity for you.
If you need help with deciding whether a C corp, an S corp, or another business entity is the right structure for your business, you can post your legal needon UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.