- S Corp and C Corp: An Overview
- S Corp vs. C Corp – Understanding the Differences
- S Corp vs. C Corp – Determining the Right Business Structure
The primary differences between S corporation (S Corp) and C corporation (C Corp) business structure may have significant implications on the business owner’s liabilities and taxes. In this guide, we will cover S Corp vs. C Corp to help you understand which tax status is suitable for your business and which is the right business structure for you.
Before we get to understanding what S Corps and C Corps are, you must have a clear idea of what is a corporation.
A corporation is a distinct and separate legal entity from its owners, having certain rights as a person. It means a corporation can enter into contracts, borrow or loan money, pay taxes, hire employees, own assets, and sue or be sued – operating discretely from its owners. An important element of a corporation is limited liability, i.e., the shareholders of the corporation are not directly responsible for the latter’s debts and liabilities.
Now that you know what a corporation is, let’s get into more detail about understanding S Corp vs. C Corp.
An S Corporation is a corporate structure wherein the legal entity can pass its income, deductions, credit, and losses through shareholders for the purpose of federal taxes. It also gets relief from limited liability and double taxation.
On the other, a C Corporation is another type of corporate structure wherein the business owners are separately taxed from the corporation itself. Tax benefits and regulatory leniency are a few reasons why businesses may choose a C Corp structure.
Consulting an experienced business formation attorney can help you determine the right corporate structure for your business.
In this section, we will discuss the basic differences between an S Corporation and C Corporation.
- Formation: To form a C Corp, you need to first form a corporation as per the regulations of the Articles of Incorporation. On the other hand, to set up an S Corp, you will first require to form a C Corp by adhering to the Articles of Incorporation. You can then convert it into an S Corp business structure by completing the IRS Form 2553.
- Ownership: When it comes to ownership, C Corporations do not have any restrictions regarding who can be the shareholders and how many owners they can have. However, S Corps come with more restrictions, i.e., they can have only up to 100 shareholders. Additionally, the shareholders should be individuals and lawful U.S. citizens.
- Taxation: Taxation is one of the key factors you should consider for S Corp vs. C Corp. Typically, S Corporations are formed for tax relief because they act as “pass-through entities.” It means there are no corporate taxes. An S Corp does not pay taxes directly; rather, the shareholders are liable for reporting the income & loss of their business when filing their personal tax returns.
On the other hand, a C Corp is taxed twice. The owners are responsible for paying federal income taxes on the dividends they earn from the corporation, while the latter also needs to pay corporate income taxes. This is known as double taxation.
- Fundraising: C Corporations can issue preferred stocks or common stocks to raise funds. Preferred stocks do not come with any voting privileges, while common stocks come with voting privileges. On the contrary, S Corporations have the limitation to offer only one class of stock for fundraising.
- IRS Scrutiny: The IRS scrutiny for C Corps is average, whereas it is above average for S Corps when it comes to dividends vs. balance of salary.
Now that you know the basic differences between S Corp vs. C Corp, which one do you think is the right business structure for you? Well, there is no one best option. Each business structure has its own unique tax treatments, complexities of ownership, and regulations. Therefore, when forming a corporation in the USA, the choice of business structure should depend on your specific situation. It is recommended to consult a corporate attorney who can guide you through the entire business formation process and help you determine the right structure.
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