While S corp and C corp may sound similar, there are some key differences in how these two entity types are formed, their tax advantages, their shares of stock, and the way they need to operate.
What’s an S corp?
An S corporation (S corp) is a legal entity and tax designation defined by its pass-through tax status. By electing to be taxed under Subchapter S of the Internal Revenue Code, S corps may forgo paying corporate income taxes and as an alternative pass all business income, losses, deductions, and credits through to shareholders for federal tax purposes.
Those shareholders then report the distributions on their personal tax returns, and taxes are assessed at their personal income tax rates. This enables an S corp to avoid double taxation on corporate income.
What’s a C corp?
A C corp is an organization that issues stocks to shareholders and is run by a board of directors. Big US firms like Microsoft and Walmart are C corporations—that’s, their income is taxed under Subchapter C of america Internal Revenue Code.
The important thing defining features of C corps lie in liability and tax treatment, nonetheless. Like S corps, C corps shield their shareholders from business-related liability. Anyone who sues a C corp cannot reach the private assets of its shareholders.
C corps are taxed on corporate income, and shareholders are taxed again on any dividends they receive from the corporate. This is known as “double taxation.”
What’s the difference between an S corp vs C corp?
The essential difference between an S Corp and C Corp lies in federal income tax liability and ownership. S corps are pass-through entities, where profits and losses go through to shareholders’ personal tax returns. C corps are separate taxable entities, subject to double taxation.
S corps have ownership restrictions, while C corps offer more flexibility but potentially higher tax implications. Each entities offer limited liability protections.
It’s essential for any small business owner to grasp these differences with a purpose to make early stage decisions on your small business structure that may affect long-term payouts to shareholders.
Here’s an summary of the important thing similarities and differences between the 2 forms of corporations.
| Attribute | S Corporation | C Corporation |
|---|---|---|
| Formation | Articles of Incorporation and IRS Form 2553. | Articles of Incorporation. |
| Fundraising | One class of stock. | Common or preferred stock. |
| Shareholders | US residents or everlasting residents. As much as 100 shareholders. | No restrictions on number or variety of shareholder. |
| Operations | Must elect officers, hold annual board meetings, follow bylaws. | Must elect officers, hold annual board meetings, follow bylaws. |
| Taxes | Shareholders pay personal tax on distributions. | Required to pay business tax on income. |
| Formation costs | $1,200, on average. | $633, on average. |
Formation
The formation of S corps and C corps are similar. For each, you must file Articles of Incorporation, adopt bylaws, obtain an employer identification number (EIN), and maintain compliance with state requirements.
There’s one major difference within the formation process: electing S corp status, which involves filing IRS Form 2553. S corps have to finish this step inside a certain timeframe. States might also have different requirements for S and C corporations, depending on their laws and regulations.
Here’s more information on the best way to start each variety of corporation:
Fundraising
Each could be funded through the issuance of stock.
C corps can issue common or preferred stock. Common stock comes with voting privileges; preferred stock comes with no voting privileges, but preferred stockholders jump the road when it comes to priority in relation to receiving dividends, or payouts if an organization is liquidated. S corps are limited to offering one class of stock.
Shareholders
Each S corps and C corps allow shareholders, which suggests multiple people can own portions of the business.
S corps need to look at rules concerning the variety of shareholders and who their shareholders could be that C corps don’t. S corps may issue shares to a maximum of 100 shareholders, all of whom have to be actual people (not corporations) who’re US residents or everlasting residents. If an S Corp transfers ownership to a nonresident after formation, it should lose its tax status.
C corps may issue as many shares as they prefer to anyone or anything they like: corporations, nonprofits, residents of foreign countries even.
Taxes
Shareholders for each S corps and C corps pay personal-rate taxes on corporate distributions. (These are often known as “dividends” when issued by C corps.) Each shield shareholders from corporate liability, protecting their personal assets within the event of litigation.
C corps pay corporate income tax, and their shareholders pay taxes on any distributions from the corporate, meaning dividends are essentially taxed twice. S corps enjoy pass-through tax treatment, meaning shareholders pay personal income taxes on distributions from the corporate only.
Operations
Each S corps and C corps require appointing corporate officers; e.g., a board of directors. These boards must meet at the least annually and keep detailed minutes of every session.
Each entity types must draft, file, and abide by company bylaws regarding the makeup and voting of boards, issuance of stock, scheduling of annual meetings, etc. They each also must file an annual report and have a registered agent.
Formation costs
Based on ContractsCounsel’s marketplace data, the typical cost of forming an S corp is $1,200. ContractsCounsel also found the typical cost of beginning a C corp is around $633.
S and C corps could be expensive to form compared with other structures, like LLCs or sole proprietorships.
S corp vs. C corp: Which is best for you?
Selecting between forms of corporations requires entrepreneurs to ask quite a lot of essential questions:
- Do you wish or want to lift money to your company by issuing stock?
- Do you foresee having investors who’re foreign or business entities?
- Do you ever intend to sell your organization?
- How large of a shareholder pool do you envision within the immediate future? In five years?
- Are you able to afford double taxation? If not, are you able to bear the additional IRS scrutiny?
Navigating these questions will likely lead you to the perfect option for your small business. But when not, don’t worry—you aren’t trapped in a dichotomy of S corps and C corps. Perhaps an LLC, partnership, or perhaps a sole proprietorship is a greater fit to your needs when starting your small business.
S Corp vs. C Corp FAQ
What is the difference between an S corp and a C corp?
An S corp is a variety of corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. Because of this the entire profits and losses of the S corp are passed through the shareholders and reported on their personal income tax returns, which avoids the double taxation that applies to C corps. C corps, then again, are taxed individually from the owners and the company income is subject to double taxation. C corps even have more restrictions, equivalent to the variety of shareholders, and are subject to more complex filing requirements.
Who pays more taxes, an S corp or a C corp?
Generally, a business with S corporation status pays less taxes than a C corporation due to pass-through taxation. It’s because S corporations are pass-through entities, meaning their income is passed through to their shareholders, who’re then taxed at their individual income tax rates. By comparison, C corporations are taxed at the company level, which tends to be higher than individual tax rates.
How do I do know if an organization is a C corp or an S corp?
Yow will discover out if an organization is a C corp or an S corp by consulting the corporate’s public records, equivalent to their filing with the Internal Revenue Service (IRS) or their Articles of Incorporation. You may as well contact the corporate directly and ask them to supply the essential information.
What is healthier: an LLC or an S Corp?
The reply to this query will rely upon the precise needs of the business. A limited liability company (LLC) offers more flexibility when it comes to corporate structure, taxation, and management. S corporations provide certain tax benefits, equivalent to the flexibility to avoid double taxation and the potential for shareholders to receive special tax treatment. Ultimately, the perfect alternative for a startup will rely upon its individual needs and goals.
