What Is an S Corporation vs C Corporation?
The main difference between C and S corporations is in the way their income is taxed.3 min read
2. Potential Similarities of S Corporations and C Corporations
3. Potential Differences Between S Corporations and C Corporations
The main difference between C and S corporations is in the way their income is taxed. In C corporations, income is taxed twice: First, the corporate tax is imposed on the net income, and second, the shareholders pay individual taxes on dividends. Corporations are usually classified as C corporations and regulated under subchapter C of the tax code, except when registered as S corporations, where they are regulated through subchapter S of the tax code.
A C corporation can become an S corporation by meeting the requirements and filing the proper forms. If a company is registered as an S corporation from the start, there will be no concerns with double taxation or making changes from a C to an S corporation.
C or S Corporation Choice for Small Business
S corporation income is taxed only once, at the shareholder level. In regards to corporate structure, it is recommended to organize a business as an S corp rather than an LLC. However, S corporation structure has a more complex set of accounting rules and regulations, and these rules make it difficult for a business owner to switch from the existing business structure to a C corp.
If a business is an S corp that performs as a C corp with an S status during a 10 year period, facing corporate tax is highly possible. However, if a business starts as an S corporation, many of the previously mentioned rules could be avoided. The most practical option is to file for your corporation formation using Form 2553 during the first 75 days.
Potential Similarities of S Corporations and C Corporations
Both S and C corps experience limited liability, which means that shareholders can never be accountable for debts and obligations of the business.
- As individual legal entities, S corps as well as C corps are established through state fillings. State documents for either type of corporation are usually called a Certificate of Incorporation or Articles of Incorporation.
- These forms are the same for both types of corporations.
- Both S and C corporations have officers, directors, and shareholders. Shareholders elect a board of directors, which then manages and makes the decisions for the corporation.
- Overall, the members of the board are not accountable for everyday business activities. The board elects officers for these corporate procedures and responsibilities, which must be met for both S corporations and C corporations.
- Examples of these procedures are the distribution of stock, the adoption of bylaws, holding regular meetings of shareholders and directors, the publication of annual reports, and the payment of fees.
Potential Differences Between S Corporations and C Corporations
Even though S corporations and C corporations have numerous similar characteristics, they also have many differences.
- The main difference between S corporations and C corporations is taxation. As business entities, C corporations are taxed on the corporate level using Form 1120.
- If the corporate profits are paid as dividends to owners, that is personal income for those owners. As a result, C corps face double taxation, once for the corporation and again as personal income from dividends.
- S corporations pass through their taxes to owners, which means they do not have to pay tax at the corporate level. Instead, they file Form 1120S, which is for information only.
- The business owners or shareholders of S corporations accept all responsibilities for business profits and losses, which are reported on the owners' individual tax forms, and the business itself is not accountable for the taxes.
- C corporations do not have limitations on ownership, while S corporations do.
- S corporations are allowed only up to 100 shareholders. Also, all shareholders of S corporations need to be US citizens or residents.
- C corporations cannot own S corporations, and S Corporations cannot own LLCs, other S corporations, partnerships, or certain trusts.
- S corporations can issue only one kind of stock, but C corporations can offer various categories of stocks.
- C corporations are a more flexible structure when founding a business, especially if the business later grows, needs additional owners, or is sold. The main advantage of an S corporation is to pass through corporate profits and losses to owners in order to avoid corporate taxation.
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