S Corp vs C corp Taxes: Everything You Need to Know
Comparing S corp and C corp taxes is crucial before you select a business structure. Although they share similar characteristics, they are taxed differently. 3 min read
Comparing S corp and C corp taxes in terms of your company's responsibilities is crucial before you select a business structure. Although these two structures share similar characteristics, the main difference is how they are taxed. C corporations are separate taxable entities, whereas an S corporation is known as a "pass-through" entity. This means that, unlike C corporations, S corporations are not subject to double taxation.
What Is a C corporation?
A common business entity for small businesses, a C corporation is the default formation of a corporation. Being a separate legal entity, a C corporation is owned by shareholders. Each shareholder benefits from liability protection, meaning corporations are treated as separate legal entities.
This is beneficial to the shareholders, as they are not typically responsible for company liability or debts. Although shareholders have control over policy issues within the company, business decisions are generally left to the corporation's directors, which are assigned by the shareholders.
In regard to day-to-day operations, these responsibilities fall on the corporation's officers, such as the company's CEO or COO. If this is the type of business you would like to form, you will need to file the appropriate documentation. This will include your articles of incorporation.
C Corporations: Advantages and Disadvantages
When forming any new business, you will need to fully understand the pros and cons of each business structure.
By structuring your business as a C corp, you will benefit in the following ways:
- Limited liability — all of the corporation's officers, directors, shareholders, and employees are protected in relation to company obligations and debts.
- Perpetual existence — This is enjoyed by both C corps and S corps. If the corporation's owner passes away or moves on, the business will still exist.
- Tax benefits — As a C corporation, you will be able to deduct certain costs, including employee benefits.
- No maximum shareholder limit — Not only can C corps have as many shareholders as desired, but they can also have foreign shareholders.
- It is easier to raise money — Being able to issue numerous classes of stock, C corporations often find it easier to raise money and obtain investors.
- While the above benefits make C corporations ideal in terms of growth, there are disadvantages you need to consider as well, including:
- Double taxation — A C corporation's revenue is taxed both at the corporate and personal level.
- More extensive regulations — When in it comes to structuring a C corp, this process can be fairly complicated. Although this process will vary from one state to the next, you will need to complete a number of mandatory steps. In addition, once you have formed a C corporation, you will also face stricter compliance requirements.
Overall, large companies benefit from greater growth potential under a C corporation, but can also expect to pay more in taxes. Greater effort is also required in terms of overall compliance.
What Is an S Corporation?
Structured the same as a C corporation, an S corporation's shareholders own the business, the board of directors focus on the overall direction of the business, and the officers manage day-to-day operations. This type of business structure also offers limited liability protection. Unlike a C corporation, however, an S corporation cannot have more than 100 shareholders.
The main advantage associated with this type of business structure is in relation to taxation, as S corps are "pass-through" entities.
S Corporation vs C Corporation: Taxation
When deciding between an S corp and a C corp, taxation is often the greatest deciding factor.
- C corporations are taxed as separate entities and are required to file Form 1120. If income is distributed among shareholders, the business will face double taxation. This means that tax will be paid at the corporate level and then again at the individual level.
- S corporations file Form 1120S but are not required to pay taxes at the corporate level. Instead, this income "passes through" to the company's owners. The individual shareholders then pay taxes based on their percentage of ownership.
Before you form a business, it is important that you compare the requirements of various business structures. If you would like to form a corporation, taxation will be a major variable to consider. If you are unsure what structure is best suited for your needs and objectives, it is recommended that you seek a professional opinion.
If you need help comparing S corp vs C corp taxes, 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, Stripe, and Twilio.