C Corporation vs S Corporation vs Partnership: Everything You Need to Know
When comparing C corporation vs S corporation vs partnership business entity structures, note that these entities have both similarities and differences on many different fronts. 3 min read
2. Ownership Differences
3. Stock Differences
5. Similarities Between S-Corps and C-Corps
When comparing C corporation vs S corporation vs partnership business entity structures, note that these entities have both similarities and differences on many different fronts. It's important to know the differences between the entity types available, especially when forming a company.
The most notable differences between S corporations (S-Corps), partnerships, and C corporations (C-Corps) have to do with taxation and ownership restrictions. When you're starting a business, it's good to understand these differences to be sure you choose the right business structure to help you meet your business goals.
Taxation Differences Among S-Corps, C-Corps, and Partnerships
S-Corps and partnerships are taxed as disregarded entities, meaning they're not viewed as their own separate entity from their owners or shareholders. Therefore, they are not subject to company taxes.
The income for S-Corps and partnerships passes through to the owners and is only taxed once on the owner's personal income tax returns. S-Corps are still required to file a 1120S form to report the company income, but they are not taxed on it.
C-Corps are viewed as legally separate entities. Therefore, they are taxed on their company income by filing a Form 1120. This leads to double-taxation, as the income is taxed both at the company level and again when the shareholders claim their dividends on their personal income tax returns.
Any salary or dividends collected from the business by the owners or the shareholders must be taxed as personal income, whether the business is a C corporation, a partnership, or an S corporation.
S corporations have quite a few limitations when it comes to ownership and shareholders. For example:
- An S-Corp cannot have more than 100 shareholders at one time.
- All shareholders must be citizens and residents of the United States.
- Other business entities cannot own shares in an S-Corp.
C corporations are not limited to how many shareholders they can have. Individuals and business entities can own shares in a C-Corp, the owners don't need to be U.S. citizens, and they can even be foreign companies.
C-Corps can offer different types or classes of stock to investors. The two main types are:
- Common stock
- Preferred stock
The classes determine levels of influence in the company. This option for different levels of stock makes C corporations a great option for businesses looking for growth and a wide range of investors.
S corporations can only offer one level of stock to investors, so all have the same rights and level of influence.
Business owners can enjoy quite a bit of flexibility if they choose to form a partnership. However, they must have two or more members, also known as owners. Partnerships also enjoy specific tax benefits not available to C corporations or S corporations.
Similarities Between S-Corps and C-Corps
C corporations are usually the type of entity people think of when they hear the word "corporation." S corporations are tax designations that can be elected by LLCs and other entity types. In order for a company to elect S-Corp status, they need to fill out Form 2553.
Both corporation types get their names from their definitions under the IRC (Internal Revenue Code):
- C corporations are taxed under the subchapter C of the IRC.
- S corporations are taxed under the subchapter S of the IRC.
S-Corps and C-Corps both offer liability protection for their shareholders. If the company goes into debt or defaults on a loan, the shareholders' personal assets are not at risk.
Business owners can create an S-Corp or a C-Corp by filing Articles of Incorporation with the state, and then electing the desired entity type with the IRS.
Articles of Incorporation are also called:
- Formation Documents
- Certificate of Incorporation
- Articles of Organization
Both S-Corps and C-Corps are required to have the corporate structure with an elected board of:
The board of directors is a group of shareholders that:
- Manage the big company decisions
- Enforce the bylaws
Officers are elected by the directors to handle the regular business operations.
There are a few requirements for both S-Corps and C-Corps, including:
- Directions and officers
- Regular meetings of shareholders and directors
- Annual report filings
- Annual fees
If you need help with understanding C corporations versus S corporations versus partnerships, 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.