C or S Corporation Difference: Everything You Need to Know
The C or S corporation difference lies primarily in the taxation of each entity type and allowances for shareholders. 3 min read
2. C Corps and S Corps Taxation Differences
3. Rights of Shareholders for S Corps and C Corps
4. Ownership Rules for S Corps and C Corps
5. Is a C Corporation or an S Corporation Structure Best for Your Company?
The C or S corporation difference lies primarily in the taxation of each entity type and allowances for shareholders. However, there are many other notable differences to keep in mind when choosing the right structure for your company.
Differences Between C Corporations and S Corporations
There are plenty of similarities between S corporations (S corps) and C corporations (C corps). But there are quite a few differences worth noting.
The three main ways S corps and C corps differ are:
- Rights of shareholders
- Ownership options.
C Corps and S Corps Taxation Differences
The IRS views S corps similarly to sole proprietorships or partnerships in which the owners of the company claim all the business income on their personal tax returns, and the company isn't taxed as a separate entity.
C corps are required to file a corporate tax return, also known as Form 1120, so the corporation itself is held responsible for income taxes. Shareholders of a C corp are also required to report any income they collect from dividends on their personal income tax returns (Form 1040), so the income of the C corp is actually taxed twice.
S corps are still required to file an income tax form, Form 1120S. However, it's only for IRS records, so the company isn't required to pay a corporate tax.
Shareholders or owners in both entity types are held responsible for taxes on any money collected from the corporation, whether it's salary or dividends.
Rights of Shareholders for S Corps and C Corps
All shareholders are afforded equal rights within an S corp when it comes to voting because they all own the same class of stock. C corps can offer different types of stock, which creates a hierarchy within the shareholders that an S Corp doesn't have. Depending on the type of stock a particular shareholder in a C corp owns, his or her vote may count more or less than the vote of others.
Usually the founding owners or shareholders of a C corp hold the most valuable stock, and therefore, the most rights within the company. S corp shareholders are all offered the same class of stock, whether they are newcomers or have been around since the beginning.
The stock of a C corp can be owned globally. Therefore, this entity type can gain more of a widespread recognition than an S corp, allowing for more opportunities for growth and ownership.
Shareholders who enjoy any fringe benefits as employees, like certain insurances, will be taxed differently depending on the entity type. C corps can offer these benefits to their employees without taxes if they give the benefits to as many as 70 percent of their workers. Employees of S corps are taxed on any fringe benefits if they own a stock percentage that's higher than 2 percent.
Ownership Rules for S Corps and C Corps
Another major difference between S corps and C corps are their rules for ownership.
Almost any individual or business entity can be an owner, also called a shareholder, in a C corp. S corps, however, have quite a few restrictions when it comes to shareholders:
- S corps may only have up to 100 shareholders at a time.
- All shareholders have to be citizens and residents of the United States.
- Other business entities cannot own stock in an S corp, although there are a few exceptions, such as trusts and estates.
Is a C Corporation or an S Corporation Structure Best for Your Company?
Small business owners usually choose to form an S corp because they:
- Meet the requirements of less shareholders
- Want the tax benefits
- Are not usually looking to grow on a global scale.
Some businesses will find better advantages in a C corp structure when they're:
- Hoping to become large companies
- Have other business entities as investors
- Bring in more capital.
When forming a company, it is best to seek legal advice on the perfect business structure to fit your vision and needs as an entrepreneur.
If you need help with understanding the differences between a C or an S corporation, 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.