One of the most common options a business person would come across is whether to form a C corp or S corp when starting a business or changing his/her business structure. These are the two most common ways to incorporate, and the choice is really yours according to your business goals.
In order to know which one is better for your business, it is important to know about them first.
C corp or S corp-
C corp– Under United States federal income tax law, a C corporation Formation refers to any corporation that is taxed separately from its owners. Thus a C corporation differs from an S corporation, which generally is not taxed separately.
S corp– Under United States federal income tax law, an S corporation Formation is a corporation with 100 shareholders or less with benefits of incorporation while being taxed as a partnership.
C corp Or S corp: The similarities
S corporation has elected a special tax status with IRS, while C Corporation is the standard corporation. It gets the name because it is defined in subchapter S of the Internal Revenue Code (IRS). Form 2553 must be filed with the IRS and all S corporation guidelines be met. But C corp and S corp share many qualities:
- Both the corporations whether S corp or C corp are separate legal entities created by a state filing.
- Limited liability protection is offered by both the corporations, so shareholders (owners) are typically not personally responsible for business debts and liabilities.
- Filing of Formation documents must be filed within the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations.
- The structure is the same for both the entities as 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.
- There are the same internal and external formalities which are required to follow by both the types of corporations. Even the obligations are same such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports, and paying annual fees.
C corp vs. S corp: The differences
C corp or S corp differs at many points in spite of their many similarities
- Taxation is the most significant difference for small business owners when evaluating S Corp vs. C corp
- C corporation is separated into taxable entities. People who opt to file a corporate tax return (Form 1120) have to pay taxes at the corporate rate. If the corporate income is distributed to business owners as a dividend which is considered personal income then they also face the possibility of double taxation. Tax on corporate income is paid first at the corporate rate and then by owner at the individual rate on dividends.
- S corporations are pass-through tax entities. No income tax is paid at the corporate level when they file an international federal return (Form 1120). 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.
- Personal Income Taxes is due both on any salary drawn from the corporation and from any dividends received from the corporation with both types of corporations.
- Corporate ownership The major difference between both the corporations is that C corp has no restrictions an ownership, but S corp does. S corps are restricted to no more than
100 shareholders and shareholders must be US citizens/residents. C corporations, LLCs, partnerships or many trusts cannot own an S corporation. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. Enough flexibility is provided by C corporation when starting a business. And if you also plan to grow, expand the ownership or sell your corporation.
C Corp or S Corp: Which is Best for You?
Generally, for small businesses S corp registration is more preferred than C corp registration, which usually fit within the legal limitations for an S Corp and there are certain types of corporations which find more advantages with a C corp.
No availability of S-corp to the large corporations. It is often seen that an S Corp is more popular with smaller business. Because of the likely tax savings. A C Corp is more popular with larger companies because of the greater flexibility to raise capital.