“The difference between a C Corporation vs S Corporation…”
No other question stresses out a brand-new business owner more than what type of business structure they should have.
When you’re incorporating, choosing the right structure C or S Corporation could make or break your business.
Your business structure is an important decision that should be made after some research.
Do you want an LLC, C or S Corporation, Corporation, or a Partnership?
If you’ve narrowed it down to a C Corporation vs S Corporation, half of the work is done!
Now you just have to learn the difference between C and S Corporation to make a final decision.
I’ve put together this article to help you learn more about choosing a C or S corporation.
If you need help making the decision, or are ready to start your business, email me at [email protected] for a consultation today.
Here’s a quick summary:
|Taxes Paid by the C-Corp
C-Corp pays taxes for itself
Owners pay taxes for the S-Corp
|Unlimited Shareholders||Limited Number of Shareholders
S-Corp is limited to 100 shareholders
|Multiple Stock of Classes
C-Corp can issue unlimited # of classes
|Single Class of Stock
S-Corp can issue only 1 stack of stock
|Flexible Stock Options
C-Corps have freedom in issuing employee stock options
|No Stock Options
S-Corps can’t give out stock options
Let’s get started…
What is a C Corporation?
A C Corporation is a business structure in which the profits of the business are taxed separately from its owners.
The Internal Revenue Code from the IRS has a subchapter that’s labeled “C” – and this is where a C Corporation gets its name.
The profits are taxed using subchapter C. A C Corporation, or C Corp for short, is a separate entity and is owned by shareholders. The shareholders elect a board of directors who make all decisions and oversee the business’s policies.
What is an S Corporation?
An S Corporation is a business structure in which the profits of the business are passed through its shareholders. It’s called a pass-through entity for this reason.
The “S” in S Corporation stands for small because an S Corp has limits on stock and shareholders. Just with a C Corp, the S is also from subchapter S of the Internal Revenue Code.
The number of shareholders, or stockholders, is limited to 100 individuals. Also, the company can only have one type of stock.
S Corps are further limited in that the shareholders can’t be a C Corp, other S Corps, partnerships, LLCs, or trusts.
What is the Difference Between C and S Corporation?
The main difference between a C and S Corporation is that C Corporations face double taxation and are separate entities, whereas S Corporations are taxed once and are pass-through entities.
Individuals usually differentiate between a C vs S Corporation based on the tax differences.
However, there are three main areas of differences with an S vs C Corporation: ownership, shareholders, and taxation.
A C Corp can have unlimited shareholders while an S Corp can only have 100. C Corps enable anyone to be a shareholder while S Corp shareholders can’t be a C Corp, an S Corp, a partnership, an LLC, or a trust.
A C Corp can sell different types of stock, which gives some shareholders more voting power than others. However, with an S Corp, you can only have one type of stock, so all of the shareholders are the same.
C Corps pay taxes at the corporate level as a business. The members with dividends also pay personal taxes – creating double taxation. S Corps are only taxed once, at the personal level, because the S Corporation is a pass-through entity and all of the profit is taxed on the shareholders’ income taxes.
If you need help determining the differences between a C Corporation vs S Corporation, please email me at [email protected] with your questions.
What are the Advantages of a C Corporation?
The advantages of a C Corporation are: unlimited shareholders, strong growth potential, limited liability, tax deductions, and credibility.
The advantages of a C Corporation are:
- Unlimited shareholders – The C Corporation structure doesn’t limit how many shareholders a business can have.
- Strong growth potential – Since the company isn’t limited in stocks and shareholders, the sky is the limit in terms of the ability to grow.
- Limited liability – Directors and officers as well as shareholders and employees have protection.
- Tax deductions – C Corporations can enjoy certain tax deductions for business expenses.
- Credibility – With a formal structure, such as a C Corporation, lenders, suppliers, and customers will respect and trust the business more.
Additionally, C Corporations are usually at less risk of being audited by the IRS.
What are the Disadvantages of a C Corporation?
The disadvantages of a C Corporation are: double taxation, high filing fees, no loss deduction option, and strict regulations.
The disadvantages of a C Corporation are:
- Double taxation – Since the C Corporation is a separate entity, revenue is taxed as a business and then dividends for the shareholders are taxed at the personal level.
- High filing fees – Filing all of the required documents and paying fees to the corporation’s state can get to be pretty expensive.
- No loss deduction option – If the company has a loss, shareholders can’t deduct it on their personal income tax returns like S Corporations can.
- Strict regulations – C Corporations have complex tax laws and the owners are protected from financial obligations or lawsuits. Because of this, C corps deal with more government oversight and strict regulations that can be a headache for owners.
If you’re unclear about how the advantages and disadvantages of a C Corporation would apply to your business, email [email protected] to schedule your consultation.
What are the Advantages of an S Corporation?
The advantages of an S Corporation are the protection the structure provides to the owners, taxation, loss deductions, income options, ownership transfer, and credibility.
The advantages of an S Corporation are:
- Protection – The S Corporation limits the liability of its shareholders. This means that shareholders aren’t personally responsible for finances or legal issues of the business.
- Taxation – An S Corp is a pass-through entity, which means the income passes through to the shareholders. Translation? Income is taxes only once, at the personal level, instead of as business.
- Loss deductions – If the company experiences any loss, the shareholders can take it as a business loss deduction on their personal tax returns.
- Income options – The S Corporation structure allows shareholders to be employees of the business and have a salary as well as receive dividends and other tax-free distributions.
- Ownership transfer – Transferring interests in the S Corporation is easy and doesn’t result in tax consequences. Furthermore, there are no complicated accounting rules to follow when transferring ownership.
- Credibility – Just as with the C Corp, establishing an S Corporation gives your business more credibility and trust with potential customers, suppliers, and lenders.
What are the Disadvantages of an S Corporation?
The disadvantages of an S Corporation include high filing fees, stock limitations, IRS scrutiny, and less income allocation flexibility.
The disadvantages of an S Corporation are:
- High filing fees – Just as with a C Corporation, an S Corporation has expensive creation and filing fees as well as potential ongoing fees.
- Stock limitations – With an S Corp, you can only have one class of stock and are limited to only 100 shareholders. The good news is that the shares can be both voting and non-voting. Additionally, other trusts and entities can’t own stock and foreign ownership isn’t allowed.
- IRS scrutiny – Since shareholders can take a salary or a dividend, the IRS scrutinizes any payments made to make sure they are classified correctly. In some cases, wages are re-characterized as dividends and dividends as wages.
- Less income allocation flexibility – Allocation of income or losses is determined by stock ownership instead of in the ownership agreement. This means that income and losses aren’t easily allocated to certain shareholders. An accumulated adjustment account is necessary which may require an accounting professional.
Additionally, the S corporation is not always recognized by every state for income tax purposes. For instance, New Hampshire doesn’t recognize an S Corporation when it comes to income taxes.
In some cases, businesses are considered a C Corporation by default. If this is how it is in your state, you will have to file a form electing for S Corp taxation treatment.
The easiest thing for you to do in order to determine the laws in your state is to contact a business lawyer. Email me at [email protected] and I’ll get back to you as soon as possible.
S Corporation vs C Corporation – Which is Better?
When it comes to which is better, an S Corporation vs a C Corporation, it really depends on your business.
The truth is that there are more similarities between a C Corporation and an S Corporation than there are differences.
But the differences that do exist are critical factors of choosing between the two.
C vs S Corporation – Similarities and Differences Summed Up
Overall, C and S Corporations are more alike than they are different.
To make it easy to understand, we’re going to break down how they overlap and how they’re different in a quick list.
C Corporation vs S Corporation Similarities
- Both offer limited liability protection so owners are not personally responsible for liabilities and debts of the business.
- Both require formation documents (Articles of Incorporation) to be filed with the state.
- Both are legal separate entities that are created through a state filing.
- Both an S Corp and a C Corp have officers, directors, and shareholders.
- Both have the same corporate obligations and formalities. This includes issuing stock, holding meetings, paying annual fees, filing annual reports, and adopting bylaws.
S Corporation vs C Corporation Differences
Taxation is the most significant difference when it comes down to S Corporation vs C Corporation.
Let’s look at it side-by-side:
- S Corporations are pass through entities. Income tax isn’t paid at the corporate level, but instead the profits and losses are passed through to the owners. The owners pay any necessary tax at the personal income tax level.
- C Corporations are separate entities and are taxable. C Corps must file a corporate tax return to pay taxes at the corporate level. If the owners receive dividends from the corporate income, that is also taxed at the personal level. In other worse, corporate income is paid at the corporate level and at the personal level resulting in double taxation.
- Both C and S Corporation owners must pay personal income taxes on the salary and dividends they receive from the corporation.
Additionally, S Corporations have limitations on ownership while C Corporations do not have the same restrictions.
S Corporation vs C Corporation – Which One is Right for You?
Determining if a C or S Corporation is right for you really comes down to a personal choice.
Generally speaking, smaller business usually chose an S Corporation structure while larger businesses choose a C Corporation structure.
One of the best things you can do to help you determine which type of structure to choose is to contact me at [email protected] so I can answer your questions.
However, the following information may help you determine what to do, or at least narrow it down some.
A C Corporation may be the best choice for your business if:
- You anticipate needing venture capital.
- You want your company earnings to stay in the business to help it grow.
- You’d like the owners to have flexible profit-sharing.
- You want the ability to divide earnings between the shareholders and the business to help with tax purposes.
- You want to have the option to easily sell your business.
- You plan to offer employees stock options.
- You anticipate your business will own real estate.
- You’d like to lower your risk of being audited.
- You want to be able to set salaries for your owners/employees to minimize your tax liability.
- You want your business to be able to provide medical and health benefits as well as life insurance options, travel reimbursement, and educational stipends.
An S Corporation may be the best choice for your business if:
- You want to take advantage of having a corporate business type, but also like the ease of pass-through taxation.
- You want to be able to choose the accounting method you use. S Corporations with gross sales under $5,000,000 don’t have to use the accrual method unless inventory is involved.
- You want to be able to set salaries for your owners/employees to minimize your tax liability.
- You’d like to lower your risk of being audited.
When you are considering which structure to choose, it’s easy to think how your business will be in the first year or so. Remember to consider the long term and your vision as well.
I’d be happy to talk through your options with you. Email me at [email protected] for your FREE consultation.
Where Should You Incorporate Your Business?
You should incorporate your business in the state that you live in.
Keep in mind that unless you have a company with more than 5 shareholders, the advantages of incorporating your business in another state likely won’t outweigh the extra hassle and filing fees of being a foreign entity.
If you have any questions about which state you should choose to incorporate your business, contact me by email at [email protected] today.
Where Can You Find a Business Lawyer?
You may need a business lawyer to help you determine which structure to choose or even to help you file your formation documents.
Forming a business isn’t something you should jump into because it’s easy to make mistakes.
Get answers to your questions and file your paperwork correctly the first time with my help.
Contact me at [email protected] for a FREE consultation to get started today.
Now that you have more information about the difference between C and S Corporation, you should feel more prepared to make a decision.
Remember, deciding between a C vs S Corporation really comes down to personal choice and how you want to run your business. There isn’t a one-size fits all answer.
The good news is that you don’t have to figure it all out alone if you don’t want to.
I’m here to answer your questions and advise you every step of the way. Email me today at [email protected] to being your consultation.