What Is the Difference Between an S Corporation vs. C Corporation?

Whether or not to form an S corporation (S corp) vs. C corporation (C corp) is one of the important general choices small business proprietors consider when starting a business or changing their business type. These are the two most common structures, and the selection actually depends upon your business targets.

S-Corp v. C-Corp: What Business Structure Is Right For You?

It’s always wise to provide yourself and your small business the liability protection that an LLC or corporation supplies. Spending only a small amount of cash up front and keeping your data updated might be the difference between success and failure. For some companies, an LLC is the perfect structure. LLCs are usually small to medium sized and have determined that they wish to go public and offer shares.

What Is a C Corporation?

C corporation is a standard enterprise entity for small companies and might be what most individuals think of when they picture a typical enterprise. Technically, a C company is identical to a company and is the default formation of a company. A C corp is the most typical type of company in the USA.

What Is an S Corporation?

An S corp is a slight variation on a C corp. Single-owner LLCs can be taxed as either a sole proprietorship or a company. LLCs with multiple owners can be taxed as either a partnership or a company. Revenue from LLCs treated as sole proprietorships or partnerships is reported instantly on the proprietor’s individual tax returns.

S Corporation vs. C Corporation: The Similarities

The C corporation is a typical company, whereas an S corporation has chosen a particular tax standing with the IRS. An S company is named because it is defined in Subchapter S of the Internal Revenue Code. To choose S corporation standing when forming a company, Form 2553 should be filed with the IRS, and all S company requirements should be met. S corporations and C corporations both provide limited liability protection, so shareholders (owners) are usually not personally responsible for company debt and liabilities.

Both the S corp and C corp are separate legal entities created by a state filing. All documents should be filed with the state. This paperwork, usually known as the Articles of Incorporation or Certificates of Incorporation, are identical for both C and S corporations. Both S corporations and C corporations have shareholders, directors, and officers. Shareholders are the owners and elect the board of directors, who in turn oversee and direct company affairs and decision-making but aren't responsible for day-to-day operations. The directors elect the officers to handle everyday company affairs.

Both S corporations and C corporations are required to observe the identical internal and external company formalities and obligations, such as the following:

  • Adopting bylaws
  • Issuing stock
  • Holding shareholder and director meetings
  • Submitting annual reports
  • Paying annual fees

S Corporation vs. C Corporation: The Differences

Taxation is commonly considered the most important distinction for small business owners when evaluating S corporations vs. C corporations. C corps are individually taxable entities. C corps file a corporate tax return (Form 1120) and pay taxes at the corporate level. C corps additionally face the potential for double taxation if company earnings are distributed to company owners as dividends, which are considered personal earnings. Taxes on company earnings are paid first at the company level and again on the individual level regarding dividends.

S corps are pass-through tax entities. S corps file an informational federal tax return (Form 1120S), but no income tax is paid on the company level. Any tax due is paid on the individual income tax level by the business owners. S corporations and C corporations are both forms of businesses, and private earnings tax is due both on any wage drawn from the company and from any dividends acquired from the company. C corporations don't have any restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders should be U.S. residents/citizens.

S corporations can't be owned by the following:

  • C corporations
  • Other S corporations
  • LLCs
  • Partnerships
  • Many trusts

S corporations can have just one class of stocks (disregarding voting rights), whereas C corporations can have a number of classes. Because of this fact, C corporations offer a little more flexibility when starting a business for those who plan to develop, increase possession, or promote their company.

If you are considering forming an S corporation or a C 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.