C Corporation vs S Corporation: Everything You Need to Know
Learning C corporation vs S corporation differences can help you choose the best type of business entity for your company.
Both C corporations and S corporations provide limited liability protection. This protects shareholders from personally being held responsible for any debts or liabilities from the business. This means that both types of corporations are considered separate entities when you create them with your state filing.
All C corp and S corp documents should be sent directly to the state, including filing documents and formation documents. There are called either your articles of incorporation or your certificate of incorporation and are identical regardless of which type of corporation you choose.
The structures are also similar in that they have shareholders, as well as directors and officers. The board directors are elected by the company's owners. The directors make high-level decisions, but leave the daily operations to the officers. Shareholders receive dividends from the company's profits.
Stock is issued regardless of whether you choose an S corp or a C corp. Both types also need bylaws to be adopted and must hold meetings of directors and shareholders each year. They need to record and maintain any meeting minutes and back up any large decision with a corporate resolution. Both corporation types are also required to submit an annual report each year to the state, along with paying fees. If you don't do these things, you can have your personal liability protection revoked and be subject to dissolution.
Despite the similarities, there are a few differences between C corps and S corps.
In terms of taxation, a C corporation is:
- An entity that is separately taxed
- Must file an IRS Form 1120, which is a corporate tax return
- Taxes are paid on the corporation itself
- Individuals must also pay taxes on any dividends received from the C corp
An S corporation, on the other hand:
- Operates as a pass-through entity when it comes to taxes
- Need to file an IRS Form 1120S, but it's simply for informational purposes
- No corporate income tax is paid.
- S corp taxes are paid on any profits or losses that get passed through to the owner's individual tax return
- The owner is then required to pay any tax that is due
Most states also allow for S corps to pass through their profits and only pay taxes via personal income tax. Some states, however, do double tax S corps, so it's important to familiarize yourself with your state tax law requirements.
Another key difference between these two entity types is that there are no restrictions on C corps in terms of ownership. S corps, however, do operate under some limitations, including a maximum of 100 shareholders. Plus, all shareholders have to be citizens or residents of the U.S. S corps also can't be owned by a C corp, an LLC, a trust, a partnership, or any S Corps. Additionally, there can only be one stock class with a S corp, while there can be several stock classes with a C corp.
C corps are also allowed to deduct expenses incurred by employee benefits, such as health insurance, disability, or even life insurance. If 70 percent or more employees receive the benefits, shareholders also aren't taxed on these expenses. An S corp, alternatively, cannot deduct any benefits expenses. They are taxable for any shareholder owning 2 percent or more stock.
Which corporation type you pick depends on many factors, particularly the size of your company. Most smaller businesses typically choose an S corp because they can realize greater tax savings. C corps are more attractive to larger companies because they can raise capital more easily. The best fit depends on your company and may even change as your company grows.
If you need help learning more about C corporations and S corporations, you can post your legal need on 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.