Knowing the differences between an S corporation and a C corporation can help you save money, time, and a headache. When forming a company, both a C corporation and an S corporation are viable options.
Below, we’ve outlined everything you need to know about the tax advantages and legal obligations of S-corps vs. C-corps:
Difference Between an S Corp and C Corp
The main difference between an S corp and C corp is that C Corps can sell stocks whereas the former cannot. They also differ in business structure, taxation, and more.
Here is a closer look at the differences between an S-corp vs. C-corp:
Difference 1. Business Structure
Every corporation technically starts out as a C corporation. By filing IRS Form 2553 , you can convert a C corporation into an S corporation. There may also be state forms required for S corporation status.
You’ll also want to customize the following business structure and agreements according to the type you’re using:
You can find the provisions for S-corporations in Subchapter S of Chapter 1 of the Internal Revenue Code. You can headquarter your business in another state, such as through a Delaware C-Corp.
Difference 2. Taxation
The primary motivation for forming an S corporation is to save money on taxes. However, the taxation of a C corporation versus an S corporation is vastly different.
C corporation profits are taxed and reported on the corporation tax return for federal tax purposes. You distribute after-tax earnings as dividends to shareholders, who must then report them on their personal tax returns.
By electing S corp status for your company, you can avoid this “double taxation.” The IRS treats an S corporation in the same manner as a sole proprietorship or partnership.
The distributed profits or losses go to the shareholders through the S corporation. They are only taxed and reported on their personal tax returns.
Difference 3. Ownership
A C-corporation will give you more options when it comes to selling stock. According to the IRS, a corporation that chooses S corporation status cannot have shareholders or issue stocks.
On the other hand, C corporations don’t have these restrictions, allowing them to expand and grow. Having multiple classes of stock, for example, can assist a company in raising capital from investors.
This strategy can execute without granting them voting rights. They can also sell stocks through an Initial Public Offering, or IPO.
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Reasons to Choose an S Corporation
S corporations reduce a business’s tax liability while easing investor eligibility requirements. They also provide more privacy protections than seen in other structures. If you have low-to-no physical overhead, an S corporation may be the perfect option for your business.
Here are five other reasons to choose an S corporation:
Reason 1. Personal Asset Protection
When forming a business under Chapter “S” of the Internal Revenue Code, it operates like a C-corporation but pays less taxes. This is like a non-incorporated business. This provision provides shareholder protection while passing earnings and losses directly to the owners.
Reason 2. Reduced Federal Taxes
You can save money by forming an S corporation. Because all corporate income deductions, credits, profits, and losses pass through to S corporation shareholders, S corporations pay no federal income tax.
S corporations also assist owner-operators. They accomplish this by effectively separating personal and professional liabilities, which also reduces tax obligations.
Reason 3. Personal Privacy
When you establish an S corporation , you create a new legal entity that is separate from yourself. This strategy ensures that the corporate entity is in charge of all your company’s actions and activities. An S corporation can help protect information about your ownership and involvement with the company if a lawsuit also threatens it.
Reason 4. Limits Liability
One of the most significant benefits of an S corporation is that it limits liability for both shareholders and management. Furthermore, you are free to appoint unlimited management. You are also not bound by any specific state residency requirements when using an S-corporation.
These rules apply as long as the shareholder is not a corporation. They must also be a U.S. citizen. S corporations also allow you to give membership to up to 100 people.
Reasons 5. All Profits Are Earnings
An S corporation is perfect if you pass all of your business profits through to earnings. The top personal income tax rate is now higher than the maximum corporate tax rate. S-corporations reduce your tax liability if your profits are your business owner’s income.
For more information about S-corps, check out this article .
Reasons to Choose a C Corporation
Are you determined to figure out if a C-corporation is the right choice for your business? Although some differences may exist, you glean several advantages from a C-corporation.
The following are some of the general reasons to choose a C Corporation structure:
Reason 1. Limitation of Liability
The main advantage of a C corporation is that it shields owners from personal liability. This advantage applies to the debts and obligations of the company. A shareholder’s liability for business debts is limited to the amount of their investment as long as they do not personally participate in any civil wrongdoing.
Reason 2. Operating Indefinitely
A C Corporation exists indefinitely. You do not have to dissolve the company when an owner dies. This is unlike a partnership or LLC in some jurisdictions.
Reason 3. No Shareholder Restrictions
Unlike an S Corporation, a C Corp can have an unlimited number of shareholders. They can also have different classes of shares, meaning that other types of shareholders have additional rights.
This is attractive if you think you will be looking to raise outside funding.
Reason 4. Outside Investors
Simply selling shares of stock makes it easier to sell or transfer a proprietorship interest. Transferring ownership interest or selling on the stock market does not require the approval of the other owners. These factors make attracting outside investment easier for this type of company.
For more information about C Corps, check out this article .
What’s Best for You: S Corp vs. C Corp?
Small businesses prefer S corporation status because they usually fit from the legal and tax parameters. Certain types of companies benefit more from being organized as a C Corporation.
Large corporations may not be able to form an S Corporation. They usually require the flexibility to have shareholders, sell shares, own shares by other entities, and issue multiple stock classes.
Smaller businesses prefer S Corporations because of the potential tax savings, while larger enterprises prefer C Corporations because of more significant capital raising. However, determining whether a C Corporation vs. S Corporation is best for your company requires careful consideration of several factors.
Can an LLC be an S Corp or C Corp?
An LLC can elect to be taxed as an S Corporation, but cannot be a C Corporation. An LLC is governed by state law, whereas federal law governs an S Corporation. Members of an LLC must pay self-employment taxes to the IRS, including Social Security and Medicare taxes.
The business formation you choose will have a significant impact on your company’s future. When setting up a pass-through entity for asset protection, limited partnerships, or joint ventures , always speak with corporate lawyers. They’ll ensure that you avoid legal mistakes entirely while achieving your short- and long-term business objectives effectively.
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