While S corp and C corp may sound similar, there are some key differences in how these two entity types are formed, taxed, what kinds of shareholders they can have, and how they must operate. Show
S corp vs C corp DifferencesThe main difference between an S corp and a C corp is how they are taxed. A C corp is taxed on its income and distributions. An S corp is only taxed on its distributions. It’s important for any small business owner to understand these differences in order to make early stage decisions on your business structure that might affect long-term payouts to shareholders. What is 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 taxes and instead pass all corporate income, losses, deductions, and credits through to shareholders for purposes of federal taxations. Those shareholders then report the distributions on their personal tax returns, and taxes are assessed at their personal income tax rates. This allows an S corp to avoid double taxation on corporate income. How to form an S corpTo form an S corp, a small business owner must ensure the organization meets certain requirements set forth by the US Internal Revenue Service: Choose a unique, unregistered business name (try our business name generator).
What are the pros and cons of S corps?S corps provide a number of advantages to business owners and shareholders, namely with regards to liability and tax treatment. Advantages of S corps
Disadvantages of S corps
What is a C corp?A C corp is a company that issues stocks to shareholders and that is run by a board of directors. Big US companies like Microsoft and Walmart are C corporations—that is, their income is taxed under Subchapter C of the United States Internal Revenue Code. The key defining features of C corps lie in liability and tax treatment, however. Like S corps, C corps shield their shareholders from business-related liability. Anyone who sues a C corp cannot reach the personal assets of its shareholders. Most unique of all, C corps are taxed on corporate income, and shareholders are taxed again on any dividends they receive from the company. This is called “double taxation.” C corps are considered the default corporation type. When you file articles of incorporation in your state of choice, the state will recognize your new corporation as a C corp, unless you file Form 2553 and ensure all other S corp formation requirements are met. How to form a C corpIn quick summary, the requisite steps for forming a C corp are as follows:
Pros and cons of C corpsThere are numerous benefits to forming and operating your small business as a C corp, aside from limited legal and financial liability for shareholders:
There are, of course, drawbacks too. C corps can be expensive to form compared with other structures, like LLCs or sole proprietorships. Because of the structural requirements (boards of directors), business operations can be relatively complex. They are also subject to double taxation. S corps vs. C corps: similarities and differencesHere’s an overview of the key similarities and differences between the two types of corporations. Fundraising
Who can be shareholders
Taxes
Free Download: 6 Steps to Get Your Business Ready for Tax SeasonTax season is stressful for any business owner. This guide will go through the process of filing income taxes in America and provide you with checklists to keep you organized and prepared. Get your free guideAlmost there: please enter your email below to gain instant access. We'll also send you updates on new educational guides and success stories from the Shopify newsletter. We hate SPAM and promise to keep your email address safe. Operations
Final thoughtsChoosing between types of corporations requires small business owners to ask a number of important questions:
Navigating these questions will likely lead you to the best option for your business. But if not, don’t worry—you are not trapped in a dichotomy of S corps and C corps. Perhaps an LLC, partnership, or even a sole proprietorship is a better fit for your needs when starting your business. See our state specific guides for California LLC, Texas LLC and Florida LLC. Join 446,005 entrepreneurs who already have a head start.Get free online marketing tips and resources delivered directly to your inbox. No charge. Unsubscribe anytime. What is the main difference of a C corporation from a S corporation?The biggest difference between C and S corporations is taxes. C corporations pay tax on their income, plus you pay tax on whatever income you receive as an owner or employee. An S corporation doesn't pay tax. Instead, you and the other owners report the company revenue as personal income.
Who pays more taxes S Corp or C Corp?If your company is making a profit and you want to take some of that money out of the company, it's generally cheaper to do so as an S corp than a C corp. But note that in some cases, the personal income tax rate paid by S corp shareholders will be higher than the corporate income tax rate.
Why would you choose C Corp over S Corp?A C Corp is subject to both corporate taxes and then owners are again taxed on dividends they received. C Corps benefit from less restrictions than an S Corp including more flexibility with ownership regulations and stock options. Less restrictions allow a C Corp more growth potential than an S Corp.
Why would you choose an S corporation?One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.
|