C Corporation vs. S Corporation
- Posted on: Jan 19 2018
The C Corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS.
C corporation vs. S corporation: The similarities
• Limited liability protection. C corps (and S corps, too) have limited liability that protects the corporation’s directors, officers, shareholders, and employees from the business’s debts and obligations.
• Perpetual existence. Both C corps and S corps have what’s called “perpetual existence.” This means if the original owner moves on or passes away, they still exist in perpetuity.
• Filing documents. Formation documents must be filed with the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations.
• Structure. Both have shareholders, directors and officers. Shareholders are the owners of the company and elect the board of directors, who in turn oversee and direct corporation affairs and decision-making but are not responsible for day-to-day operations. The directors elect the officers to manage daily business affairs.
• Corporate formalities. Both are required to follow the same internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports, and paying annual fees.
C corporation vs. S corporation: The differences
Despite their many similarities, S corporations and C corporations also have distinct differences.
• Taxation. Taxation is often considered the most significant difference for small business owners when evaluating S corporations vs. C corporations.
o C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
o S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
o Personal Income Taxes. With both types of corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation.
• Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. C corps can have as many shareholders as they want. Also, C corps can have foreign (non resident alien) shareholders, making it an ideal business entity for any company that intends to deal overseas. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. C corporations, other S corporations, LLCs, partnerships or many trusts cannot own S corporations. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes so that it is easier to raise money for your business. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.
Which to choose
Generally, S Corp status is preferred by small businesses, which usually fit within the legal limitations for an S Corp. Certain types of corporations find more advantages with a C Corp.
An S Corp is often not available to large corporations, those with a lot of start-up capital and large ambition, or those planning to sell stock globally. Large corporations may want the flexibility of being able to have more than 100 shareholders, sell shares to investors who are not U.S. citizens or resident aliens, have shares owned by other entities (corporations, LLCs, partnerships, trusts, etc.), or issue more than one class of stock.
Generally, an S Corp is more popular with smaller business because of the likely tax savings, and a C Corp is more popular with larger companies because of the greater flexibility to raise capital. However, whether a C Corp or S Corp would be best for your business is dependent upon careful analysis of various factors as they relate to your particular situation.
Posted in: Uncategorized