S Corp vs Inc: Everything You Need to Know
Putting "Inc." after your company name indicates the business is incorporated. The company's status as a C or an S Corp depends on what it files with the IRS.3 min read
2. What Is an S Corporation?
3. Similarities Between S and C Corporations
4. Differences Between C and S Corporations
Identifying as an S corp vs. Inc. can mean the difference between S corporation and C corporation status. Putting "Inc." after your company name indicates the business is incorporated in its home state. The company's status as a C or an S corporation depends on what it files with the IRS. Requirements for forming a corporation vary by state, so check with your respective state's Secretary of State office. Companies that do business in multiple states must register with the Secretary of State in each state.
What Is a C Corporation?
A corporation is what most people likely think of when they think about business organizations. A C corporation (Inc.) is a standard corporation and the default business type when you incorporate. In the United States, C corporations are the most common types of corporation. Owners are called shareholders, and they elect directors to handle day-to-day business operations.
The board of directors has the majority control of business operations but shareholders can have some control over larger policy issues. Officers on the board of directors are typically CEOs, CFOs, CTOs, and COOs. The company makes distributions to shareholders according to how many shares each person owns. Corporations are typically not responsible for business debts or liability, except in very limited cases.
To form a corporation, file registration documents and Articles of Incorporation with your respective state. Then follow standard corporation requirements, such as:
- Adopting bylaws.
- Holding director and shareholder meetings.
- Filing annual reports.
- Issuing stock, and more.
If a corporation fails to meet these requirements, the company can dissolve or lose personal liability protections.
Because a C corporation is a separate legal entity, corporate debts are only attached to company assets. Typically, a shareholder is not personally liable for corporate debts, but in certain cases, a shareholder might be liable through "piercing the corporate veil."
What Is an S Corporation?
S corporations follow Subchapter S of the Internal Revenue Code. File IRS Form 2553 to elect S corporation status provided you meet all the eligibility guidelines. You have up to 75 days after formation of a corporation to decide whether to become an S corporation.
Similarities Between S and C Corporations
- Both offer shareholders some protection from liability.
- They are both separate entities.
- They both have to file corporation formation documents with the state.
- Their structures are similar, with shareholders owning the company. Shareholders elect a board of directors that handles corporate affairs.
- Both S corporations and C corporations must maintain the same formalities.
- They have perpetual existence, which means the business exists even if the original owner dies.
Differences Between C and S Corporations
C corporations are taxed at the corporate level by filing IRS Form 1120. If any corporate income is distributed as dividends, it's subject to double taxation. S corporations are pass-through business types, meaning they file IRS Form 1120S but pay no corporate taxes.
S corporation owners report business profits and losses on their personal tax returns as they are "passed through." They must pay personal income tax for any salary taken and dividends received. Other differences between the corporation types include:
- S corporations are restricted to 100 shareholders, all of whom must be U.S. citizens or residents.
- S corporations can only have one class of stock while C corporations can have multiple types.
- Shareholders in S corporations all have the same voting rights.
- Because C corporations can have different types of stock, they have different types of shareholders.
- C corporations offer more flexibility if you ever plan to expand or sell your business.
- Because you can issue multiple types of stock with C corporations, it is easier to raise additional capital.
- C corporations can be owned by other companies whereas S corporations cannot.
- Companies that want to offer more fringe benefits, such as health insurance, life insurance, and disability insurance, will find C corporations to be better structures.
- These costs can be deducted and aren't taxable to the shareholders as long as the benefit is offered to at least 70 percent of employees.
- S corporations cannot deduct these expenses, and they are taxable to shareholders who own more than 2 percent of the stock.
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