When starting a company, one of the primary considerations you’ll have to make is what kind of business entity to form. Several options are available and they include LLC, Corporation, LP, and LLP. Then, within corporations, there are two types, which are the C Corporation and the S Corporation. Furthermore, each entity has its unique features.
Today, the focus is on the C corporation vs S corporation, whose difference has eluded many people. This article examines both the differences and similarities between the types of business entities to help you make an informed decision when the time comes to incorporate your business.
What Are The Differences Between an S Corp and a C Corp?
There are several key factors between the two types of corporations that are:
- Shareholder Privileges
The owners of an S corporation must all be citizens of the United States or resident foreigners. Other businesses are not permitted to be shareholders of an S-corp. Conversely C Corporations permit individuals, foreign businesses, limited liability companies, and other corporations to own shares in the company.
S-Corps may be ideal for smaller-sized business, given the fact that they can’t have more than 100 stakeholders participating as owners of the business. C-corps are allowed to have as many shareholders as they desire.
When creating a C corporation, you can select to have different classes of shareholders. You can have shareholders whose votes count more than other shareholders. Naturally, early founders or owners have a more significant say in voting, and hence, the operation of the business. On the contrary, S corporations have only a single type of shareholder. In that regard, it can be easier for a C-Corp to expand, and sell shares, since additional flexibility is a strong advantage.
Taxes in C corp vs S corp
Another glaring difference when talking about C corporation vs S corporation is how each entity gets taxed. S-corps are treated as pass-through entities. This means that taxation passes through company’s shareholders, who report their respective share of profits and losses in their personal income tax return. Hence, S-Corps are required to file taxes with the IRS.
Conversely, C-Corps have a double layer of taxation. They’re required to file corporate tax return and pay taxes at the corporate level. In addition, the shareholders have to report dividends received from a C-Corp on their personal tax return. Nonetheless, C-Corps have greater tax planning capability and can safeguard owners from direct tax liability.
Smaller-sized businesses often prefer the S corporation status. This is primarily because it aids them to avoid the double taxation that is associated with the C Corporation status. Likewise, new companies that are most probably operating at a loss in their formative years may benefit from S-Corp status. Shareholders can write off the business’ losses in their personal income statements and offset income from other sources.
It is also worth noting that C Corporations file an 1120 tax form, whereas S Corporations file a more informal 1120S tax form.
A C corporation is automatically formed when you decide to incorporate your business, while an S Corporation is a type of business entity that offers special tax advantages to the shareholders. S-corps have to file paperwork with the IRS. This is not a requirement for C-Corps.
Hopefully, this information has helped you understand more about C corporation vs S corporation. However, before you decide to set up anything on your own, it is advisable to discuss the options with a qualified attorney to help you make a more informed decision.