What is a C Corporation and S Corporation: Everything You Need to Know
What is a C corporation and S corporation are important considerations when wanting to incorporate your business. If you do choose to incorporate your business, it will automatically default to a C corporation.3 min read
What is a C corporation and S corporation are important considerations when wanting to incorporate your business. If you do choose to incorporate your business, it will automatically default to a C corporation. It can only become an S corporation if all owners (also referred to as shareholders) in the business consent to file as an S corp with the Internal Revenue Service (IRS).
After you’ve incorporated your business, you can elect to be taxed as an S corporation any time after incorporating. In order to do this, you will need to file Form 2553 with the IRS, ensuring that you meet the guidelines required by the IRS. One of the main guidelines for electing to be taxed as an S corp is the threshold for how much revenue the business can bring in on an annual basis. S corps are generally smaller businesses that make under $5 million a year. The main difference between the S and C corporation are taxes and flexibility in ownership.
S Corporation: An Overview
Note that LLCs, or limited liability companies, can also elect to be taxed as an S corp. The S corp is considered a pass-through tax entity, meaning that the business itself doesn’t pay corporate income tax. Rather, the shareholders will report the profits, losses, expenses, and credits on their personal tax returns. However, businesses that choose to operate as C corporations are subject to double taxation – once at the corporate level and again at the individual level if the corporation distributes dividends to the shareholders.
S Corp vs. C Corp Similarities
The S corp and C corp have several similarities, including the following:
- Limited liability protection
- Separate and distinct entity status
- Filing documents
- Issuing of stock
Any corporation offers limited liability protection to its shareholders. This means the shareholders cannot be held personally liable for the losses or obligations of the corporation. Therefore, if a lawsuit arises, creditors cannot come after the shareholder’s personal assets.
Both the S and C corp are viewed as separate and distinct entities from its owners, and this is what helps create the limited liability protection for such owners.
When filing documents, the S and C corp share the same forms. Typically, the corporation will need to file a articles of incorporation paperwork at the time of formation, followed by several other corporate forms, i.e. corporate bylaws, stock certificates, etc.
Both types of corporations operate in the same way. The company is owned by the shareholders who hire a board of directors to manage the business. In turn, the directors hire several officers to oversee the daily operations of the business. Such officer positions can include a president, vice president, treasurer, and secretary.
Both corporations can issue stock, hold annual meetings for the directors and shareholders, issue corporate resolutions, and file annual reports with the Secretary of State. Failure to abide by such rules and regulations could require the suspension or revocation of the corporate license.
Taxes for an S Corp and C Corp
Taxes are probably the most significant difference between the S and C corp.
When electing to be taxed as an S Corp (also referred to as the small business subchapter corp status), you need not worry about double taxation. However, C corps are taxed as separate entities. Therefore, they need to file Form 1120 with the IRS and pay taxes at the corporate level.
The C corp is double taxed. This means that the corporation is taxed on profits. Thereafter, if those same profits are distributed to shareholders in the form of dividends, those dividends are taxed at the personal income tax level for each shareholder.
Since S corps don’t file corporate taxes, the business will file Form 1120S with the IRS, which is strictly an information tax return that identifies the portion of profits, losses, credits, and expenses that each shareholder is responsible for.
While the taxes are different between an S and C corp, the personal income taxes do remain the same. Such taxes are due for any salary given to shareholders or dividends received from the corporation.
If you need help learning more about the similarities and differences between a C and S corp, or if you need help forming a C or 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.