Learn about the differences between S corp. and a company C. Saves you money, time, and headaches. Both C Corporation and S Corporation names are valid options when incorporating a business. Although they share some similarities, they also have some important differences. Make sure you understand the pros and cons of each method before making a decision.
C Corporations and S Corporations have a lot in common. The owners of a company are called shareholders, and they elect directors to oversee business operations. Directors employ senior management to manage day-to-day operations. Profits, called dividends, are distributed to shareholders based on the number of shares each shareholder owns. A company is formed by preparing a document called the Articles of Incorporation and filing the registration documents with the state.
Corporations must issue stock, adopt bylaws, hold annual director and shareholder meetings, keep minutes of meetings, issue written corporate resolutions for major decisions, file annual reports with the state, and pay annual fees. Failure to do these things may result in the loss of personal liability protection and the dissolution of the company.
Forming a company provides its owners with limited personal liability. A corporation is formed under state law and is a legally separate entity from the owner. As a separate legal entity, only the company’s assets are bound by the company’s liabilities. Although there are some exceptions, shareholders are not personally liable for the company’s debts, and shareholders’ assets are not protected by business creditors. While there are similarities between C corporations and S corporations, there are also some notable C Corp and S Corp Differences.
All corporations start as C corporations. A-C corporations can be converted to S corporations by filing IRS Form 2553 (Small Business Corporation Election) with the Internal Revenue Service (IRS). State forms may also be required to obtain S corp status for state tax purposes. It is called an “S” corporation because the legal provisions that allow it are found in subsection S of Chapter 1 of the Internal Revenue Code.
To obtain S corp status for a specific year, Form 2553 must be filed no later than March 15 of that year for companies operating in a calendar year. For companies operating in an alternate fiscal year, it must be submitted no later than the 15th of the third month of the fiscal year.
The main reason for choosing S corp is to save on taxes. There are significant differences in how C corporations and S corporations are taxed. For federal tax purposes, C corporation profits are taxed and reported on the corporation tax return. Any after-tax profits distributed to shareholders as dividends will be taxed again and reported by shareholders on their personal tax returns. This “double taxation” can be avoided by choosing S corp status for your company. An S corporation is considered similar to a sole proprietorship or partnership. Profits (or losses) go through S corp. shareholders and only shareholders are taxed and reported on their individual tax returns. Many states also pass on profits and losses to owners of S corporations. However, some states impose double taxation on the S Corps.
A-C companies will provide more flexibility in selling their shares. According to the IRS, a company that chose S corp. Status may not:
- Has more than 100 shareholders
- Issuing more than one class of shares
- Have shareholders who are not U.S. citizens or residents
Owned by a C corporation, other S corporation, LLC, partnership, or various trusts
None of these restrictions apply to C corporations, which can help companies grow and thrive. For example, owning more than one class of stock can help a business raise money from investors without giving them voting rights.
A company may wish to provide certain benefits to shareholders who are employees, such as health, life, and disability insurance. For a C corporation, the cost of such benefits can be deducted by the corporation, and there is no tax on shareholders as long as the benefit is provided to at least 70% of its employees. An S corporation cannot deduct benefit costs and is taxed on shareholders who own more than 2% of the stock.
Which is best for you?
C Corp Vs S Corp – Generally speaking, an S corporation. Small businesses prefer this status, which usually falls within the legal restrictions of an S corp. Certain types of companies find more advantages in C corporations. An S corporation is generally not suitable for large companies, companies with large start-up capital and ambitions, or companies planning to sell stock globally.
Large corporations may want to be able to have more than 100 shareholders, sell shares to investors who are not U.S. citizens or resident aliens, own shares owned by other entities (corporations, LLCs, partnerships, trusts, etc.) A class of stocks. Generally, S corps are more popular with small businesses because of the potential tax savings, while C corps are more popular with larger corporations because of more flexibility in raising capital. However, neither is the C corporation. Or S corporation is best for your business depending on careful analysis of various factors related to your particular situation.