C Corp and S Corp Advantages and Disadvantages
There are many C corp and S corp advantages and disadvantages and when a business incorporates, it automatically becomes a C corporation.3 min read
There are many C corp and S corp advantages and disadvantages. When a business incorporates, it automatically becomes a C corporation. A C corporation is legally viewed as an individual entity, separate from its owners, the stockholders. On the other hand, an S corporation is considered a "pass-through" entity, which means the business itself doesn't pay tax. Instead, the income is reported on the owner's personal tax return.
C Corp and S Corp Overview
Incorporating a business may provide the owner(s) with credibility and limited personal liability. When incorporating a business there are only two options:
- C corporation
- S corporation
Determining which business structure is better for a company will generally depend on the objectives and size of the business. Remember, one option may offer more advantages than the other, so it's important for business owners to understand the difference between the two entity types.
What Is a C Corporation?
In a C corporation, the individual stockholders own the company. These shareholders will have limited liability protection, meaning they will not be held personally responsible for the liabilities and debts of the corporation. The default form of incorporation is a C corporation. All of the Fortune 500 businesses are C corporations.
In the United States, C corporations are more common than S corporations. Although the stockholders of a C corporation own the business, they don't necessarily direct the day-to-day operations of the company. Instead the various operating, policy, and management duties are assigned to the elected board of directors. The executives of the corporation will report to the board of directors. The most common titles for executives are:
- CEO (Chief Executive Officer)
- COO (Chief Operating Officer)
- CTO (Chief Technology Officer)
In order to form a C corporation, the Articles of Incorporation must be filed with the local state government, usually the Secretary of State (SOS). Regulatory compliance and documentation requirements will need to be met, including paying fees and issuing stock.
Advantages of a C Corporation
One of the key advantages of a C corporation is that an unlimited number of shareholders are allowed. Businesses that anticipate hundreds or thousands of shareholders will want to form a C corporation. For example, publicly traded companies are usually C corporations.
The first $75,000 of income is taxed at the lower tax rate. This means that even if the business is new or small, there is still a benefit to incorporating as a C corporation. Foreign investors are easily able to purchase stock in C corporations. C corporations may have a different strata of stockholders at the top. In other words, C corporations may divide up the voting rights of the stockholders by issuing more than one class of stock.
C corporations may also deduct the cost of fringe benefits that they provide to employees, such as health and disability insurance. Stockholders in a C corporation are not required to pay tax on the fringe benefits received, as long as 70 percent of the corporation also receives the same benefits. It's quite easy for a C corporation to raise capital because they're able to issue an unlimited number of shares across multiple classes of stock. Also, investors have limited liability for mistakes made by the business.
Disadvantages of a C Corporation
The main disadvantage of a C corporation is double taxation. This means that the shareholder will pay taxes at both the corporate level and at the personal level for any income that is distributed to them.
What Is an S Corporation?
S corporations are entities that elect to pass corporate income, losses, credits, and deductions through to their stockholders for federal tax purposes.
Advantages of an S Corporation
The main advantage of an S corporation is the pass-through taxation that a shareholder receives. To be more specific, the income generated from the business is passed onto the stockholder instead of being taxed at both the corporate and personal level, like with a C corporation.
Disadvantages of an S Corporation
The main disadvantage of an S corporation is that it's not allowed to have more than 100 stockholders. Therefore, a publicly traded company would not be able to be an S corporation because they typically have millions of stockholders.
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