What is S Corporation Vs C Corporation: Everything You Need to Know
What is S-Corporation vs. C-Corporation? C-Corps are standard corporations, while S-Corps are corporations that elect special tax status with the IRS.3 min read
What is S-Corporation vs. C-Corporation? C-Corps are standard corporations, while S-Corps are corporations that elect special tax status with the IRS.
To elect S-Corporation status, you must file form 2553 with the IRS and make sure you meet all S-Corp guidelines. New corporations have the option to choose between filing taxes as a C-Corp or an S-Corp. S-Corps are “pass-through” business entities, so the corporation itself isn't taxed. Instead, company shareholders report business income on their individual tax returns.
C-Corps, by contrast, are not pass-through entities, and they're subject to double taxation: they're taxed at the corporate level and at the individual level if shareholders receive dividends.
Basics of a Corporation
All corporations start out as C-Corporations. They must file for S-Corporation status. A corporation's owners are its shareholders, and corporations exist as separate legal entities from their owners.
While there are some exceptions, typically shareholders are not personally liable for business debts and obligations. Shareholder assets are protected from business creditors. The amount of profits, or dividends, a shareholder receives depends on the number of shares he or she owns.
Corporations are subject to strict requirements, including the following:
- They're required to issue stock.
- They must hold yearly shareholder and director meetings.
- They must adopt corporate bylaws.
- They must keep minutes of meetings.
- They have to issue written corporate resolutions when making major decisions.
- They must file annual reports with the state.
- They must pay annual fees.
If a corporation fails to adhere to guidelines, it may lose its personal liability protection and could be terminated.
S-Corps and C-Corps: Similarities
Following are similarities shared by both S-Corps and C-Corps:
- Both business types offer limited liability protection to their shareholders in most instances.
- Both are considered separate legal entities.
- Both must file formation documents with the state, typically called a Certificate of Incorporation or Articles of Incorporation.
- Both have officers, directors, and shareholders. Shareholders elect a board of directors, which is responsible for overseeing and directing corporate affairs. The board elects officers, who manage day-to-day operations.
- Both must follow internal and external corporate obligations and formalities.
- Both enjoy “perpetual existence," meaning if an owner leaves the company or dies, the business continues to exist.
S-Corps and C-Corps: Differences
Business owners typically look at taxation when deciding between remaining a standard corporation and electing S-Corp status because this is where the business types differ most.
C-Corporations file a corporate tax return and pay taxes at the corporate level. They're subject to double taxation if business owners receive dividends, which are treated as personal income. When after-tax profits are distributed to shareholders, those profits are taxed again when shareholders report them on their individual income tax returns.
S-Corporations, on the other hand, file an informational federal tax return but pay no income tax at the corporate level. Profits and losses pass through the business to the owners, who then pay any tax due via their individual tax returns.
C-Corporations impose no restrictions on ownership, but S-corporations are subject to the following restrictions:
- An S-Corp can have no more than 100 shareholders, and all owners must be U.S. citizens or residents.
- An S-Corp can't be owned by partnerships, LLCs, other S-Corps, C-Corps, or most trusts.
- An S-Corp can only issue one class of stock.
If you prefer a little more flexibility in expansion, growth, or selling shares, C-Corps have the advantage over S-Corps.
The IRS tends to place more scrutiny on S-Corps when it comes to tax filings. If you make any mistakes in filing or fail to meet S-Corp eligibility requirements, the IRS can end your S-Corp status and tax you as a C-Corp.
Accounting rules for S-Corps can be complex. In addition, it can be difficult for C-Corporations to convert to S-Corp status. An S-Corporation can even be subject to corporate tax if it previously operated as a C-Corporation and elected S-Corp status within the past decade.
There are pros and cons to every business structure, so carefully weigh them before making a decision for one or the other. While S-Corp businesses have advantages in the tax department, they're not as flexible in terms of growth. Think about what you want your business to achieve so that you make the best decision for your company.
If you need help with S-Corporations or C-Corporations, 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.