S Corporation vs C Corp: Everything You Need to Know
C corporations are traditional corporations, while S corporations elect the status for tax purposes. 3 min read
2. Differences Between S Corporations and C Corporations
3. Which One to Choose?
Similarities Between S Corporations and C Corporations
S corporation vs. C corp -- which should you choose? C corporations are traditional corporations, while S corporations elect the status for tax purposes. In order to structure your business as an S corp, you must file Form 2553 with the IRS and make sure your business adheres to all S corporation guidelines.
Shareholders of S corporations and C corporations pay personal income taxes on company profits. Both corporation types provide limited liability protection. In most cases, shareholders can't be held personally liable for company debts and liabilities.
Both corporations are considered to be separate legal entities as recognized by the state. The types of formation documents required to create S corporations and C corporations are the same. These documents are usually called a Certificate of Incorporation or Articles of Incorporation.
Both business types have the following:
Shareholders own the corporation and elect the board of directors. The directors are responsible for decision making and overseeing corporate affairs. They also elect officers, whose roles include managing day-to-day business affairs.
Internal and external obligations and formalities are the same for both business types. These include the following:
- Adopting bylaws
- Holding regular director and shareholder meetings
- Issuing stock&
- Filing annual reports
- Paying yearly fees
Differences Between S Corporations and C Corporations
There are three major categories in which S-Corps and C-Corps differ:
- Shareholder rights
Small business owners may place the most emphasis on taxation when deciding which business type is best for them.
C corporations file corporate tax returns. These businesses, which are separate taxable entities, are taxed at the corporate level. They may be taxed double if shareholders receive corporate income in the form of dividends.
S corporations are pass-through entities that file informational tax returns. Because the business' profits and losses pass through to company shareholders, its income is only taxed at the personal level.
In a C corporation, you can have as many shareholders as you want. S corporations can have no more than 100 shareholders. All S corporation shareholders must be U.S. citizens or resident aliens. Certain domestic trusts can be shareholders in an S corporation, but owners cannot be companies like LLCs, other S corporations, C corporations, or partnerships.
C corporations have more than one class of stock, but S corporations are limited to one. Having multiple classes of stock gives C corporations greater flexibility in terms of growth and expansion.
Which One to Choose?
All corporations start out as C corporations by default. They only become an S corporation if they make the election for it with the IRS. Corporations may operate as C corporations for years and then change their status. If you make the S corporation election when you first incorporate, you don't have to worry about paying the gain tax when you convert your business from a C corporation to an S corporation.
C corporations are subject to double taxation. First, the company is taxed on the business income, and then shareholders are taxed on distributions, like dividends. An S corporation's income is only taxed once, at the individual level.
If you currently operate an LLC but wish to incorporate, you may consider forming an S corporation over a C corporation since it's designed especially for small businesses. Keep in mind that accounting rules for S corporations can be complex, and C corporations cannot convert to an S corporation if certain requirements are not met. In addition, S corporations can be subject to corporate taxes if they converted from C corporations within the past decade.
To avoid some of the hassle and rules regarding changing your status, you might want to file for S corporation tax status upon incorporating your business. If you do so within 75 days of incorporation, you'll avoid certain corporate taxes and complicated conversion paperwork.
Think about your short- and long-term goals when deciding on a business structure. You can always consult with skilled professionals in the accounting and legal fields for advice on which corporate structure best suits your company's needs, now and in the future.
If you need help determining whether an S or C corporation structure is right for your business, 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.