What is a C or S corporation? An S corporation is a type of business entity that provides unique tax advantages to owners of the business. A C corporation, on the other hand, is naturally formed when a business is incorporated. The IRS requires S corporations to file additional paperwork.

Starting a Business

Many small business owners have difficulty deciding on the ideal type of business entity to select. Although the difference may be common sense to a lawyer, it might not be common knowledge for a small business owner. It's important to know the difference between an S and a C corporation before selecting a structure for your business entity.

Your business will offer personal liability protection whether it is an S or C corporation. However, in order to receive these protections, you have to formally create your business. Paying filing fees and making sure personal and corporate finance records are kept accurately may be the difference between success and failure. Filing your business as a corporation instead of operating as a sole proprietorship is a smart way to protect yourself.

What Is a C Corporation?

When most people think of a business, they most likely associate it with a C corporation. This structure is considered to be the default type of business entity and is the most prevalent business type in the United States.

A C corporation is considered to be a separate legal entity from its owners because the organization has shareholders. Shareholders automatically have liability protections, and under state law, a corporation is treated as a legally separate entity from its employees. Therefore, only the business's assets can be seized to pay corporate debts, not the shareholders' assets.

The board of directors is elected by the corporation's shareholders. The operations of the corporation are controlled by the directors, while the shareholders are in control of overall policy matters. The day-to-day operations of the business are managed by the officers of the company. The officers report to the board of directors.

In most the cases, the only way to structure a business as a C corporation is to file specific documents with a state government. These documents are commonly referred to as the Articles of Incorporation. Corporations must:

  • Adopt bylaws
  • Issue stock
  • Hold director and shareholder meetings
  • Issue written corporate resolutions
  • Keep meeting minutes
  • File annual reports
  • Pay annual fees

The failure to perform the above actions may result in the dissolution of the business and the loss of personal liability protection. Documentation and compliance responsibilities include issuing stock, planning shareholder and director meetings, and paying all fees.

What Is an S Corporation?

There are only a few differences between S and C corporations. The IRS provides S corporations with a special tax status. An S corporation is also structured like a C corporation. Similarities include:

  • The board of directors is appointed by shareholders.
  • Shareholders own the business.
  • Shareholders are responsible for oversight over the decision making.
  • Executive officers oversee daily operations.
  • Liability protection.
  • Articles of Incorporation and the issuance of stock are required.

A C corporation may elect to transition to an S corporation at any time. However, if a business converts from a C to an S corporation, it will be required to pay the gain tax on the transformed business's income. However, S corporations cannot convert to C corporation status.

The accounting for an S corporation tends to be more complicated than for a C corporation. However, if the owners of the business believe that the corporate format benefits outweigh the costs of an LLC, an S corporation may be the ideal solution.

S Corporation vs. C Corporation: Difference in Ownership

One of the most significant differences between a C corporation and an S corporation is the regulation on corporate ownership. There are no limitations on the ownership rights of a C corporation as there is no limit on the number of shareholders the business can have.

On the contrary, S corporations can only have a maximum number of 100 shareholders. These shareholders must also be United States residents or citizens. Furthermore, S corporations may not be controlled by any C corporation, alternative S corporations, or any LLC, partnership, or trust. If an owner plans on growing the business, expanding its ownership, or selling the business, filing as a C corporation may provide more flexibility.

If you need help with deciding on whether to file as a C or S corporation, you can post your job 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