C Corporation and S Corporation: Everything You Need to Know
C corporation and S corporation entities have a few differences. 3 min read
2. Differences Between C Corporations and S Corporations
3. Structuring a Corporation or an S Corporation
C corporation and S corporation entities have a few differences. Both offer limited liability protection, but a C corporation is a standard business structure while an S corporation has a special tax status with the Internal Revenue Service (IRS).
C Corporation and S Corporation Similarities
Both corporation structures have several things in common. This includes both the C and the S corporations being separate entities that are formed by filing with the Secretary of State. The formation documents for both C and S corporations are called the Articles of Incorporation, also known as the Certificate of Incorporation.
Both structures are comprised of directors, officers, and shareholders. The corporation's shareholders own the company and are responsible for the election of its board of directors. A director's job is to keep an eye on and direct the affairs and decision-making of the corporation. Directors are not involved with or responsible for the day-to-day operation of the business. The directors are responsible for electing the officers who are responsible for managing the daily business affairs of the business.
C corporations and S corporations both follow a set of required internal and external formalities and obligations. These include filing annual reports, paying annual fees, holding meetings for the director and shareholders, issuing stock, and adopting bylaws.
Perpetual existence is attached to both C and S corporations. This means the corporation will continue to function as a business even if the owner decides to leave the business or passes away.
Additional similarities include:
- C and S corporations are allowed in all 50 states and in the District of Columbia.
- Owners are responsible for paying personal income tax on profits.
- Shareholders receive dividends (profits) according to the number of shares they own.
Differences Between C Corporations and S Corporations
While many similarities exist between the two corporation types, there are also distinct differences. One of the most significant differences when making an evaluation between S corporations and C corporations is taxation.
- C corporations file Form 1120 with the IRS and pay taxes at the corporate level. S corporations file Form 1120S but in this case, no tax is paid at the corporate level.
- C corporations are entities that are taxed separately. The tax on corporate income is paid at the corporate level, first, and then again at the individual level on dividends. C corporations can also be subjected to double taxation if the corporate income is distributed as dividends to owners. This would be considered personal income.
- S corporations are considered pass-through entities. With this status, any profits or losses incurred by the business are passed-through the business and become the responsibility of the owner to file profits or losses on their personal tax return. Taxes due are paid by the owner at the individual level.
- With both corporation structures, personal income tax is due on dividends and salary derived from the corporation.
- Regarding corporate ownership, a C corporation has no restrictions when it comes to ownership. An S corporation does have restrictions, which limits the shareholders to no more than 100.
- An S corporation cannot be owned by other entities including partnerships, C corporations, limited liability companies, trusts, and other S corporations.
- An S corporation has one class of stock. C corporations have multiple classes, which offers more flexibility to businesses interested in expanding or selling the corporation.
- C corporations are an attractive consideration for outside investors and are preferred for IPOs.
- C corporations can deduct employee benefits such as disability, health, and life insurance. S corporations cannot deduct these benefits.
Structuring a Corporation or an S Corporation
The first six steps of the formation process are the same. Form 2553 will need to be filed if you elect to have the C corporation treated as an S corporation. The steps are as follows:
- Select a legal business name and file it with your state's Secretary of State.
- Create and file the Articles of Incorporation with the state.
- Once approved by the state, begin issuing stock certificates.
- Apply for permits and licenses specific to your business and state requirements.
- Apply for an Employer Identification Number (EIN).
- Contact state and local agencies about any additional licenses, certificates, or identification needed to legally operate your business.
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