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S-Corp vs. C-Corp: Understanding the Differences
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The primary differences between S corporations and C corporations are the number of shareholders who can have a stake in the business and whether corporate profits are passed through to shareholders’ personal income.
A corporation is a type of business structure that separates business owners from the company, offering owners a high level of personal liability protection. Corporations act independently and can be taxed, held legally liable and earn a profit, just like individual business owners. You may compare S-corps versus C-corps as you choose the type of corporation to operate.
- S-corp vs. C-corp
- What is an S corporation?
- What is a C corporation?
- S-corp vs. C-corp: Overview
- S-corp vs. C-corp: Pros and cons
- S-corp vs C-corp: Tax tips
- LLC vs. S-corp vs. C-corp
S-corp vs. C-corp
When comparing S-corps and C-corps, the corporation you select would determine what taxes you owe and what regulations shareholders would follow.
|S corporation definition||C corporation definition|
What is an S corporation?
S corporations elect to pass business income, losses, deductions and credits to shareholders. Income and losses are then reported on shareholders’ personal tax returns — the Schedule K-1 form — and taxed at their individual rate, allowing S corporations to avoid double taxation on corporate income. However, income would be subject to income tax at the state level as well.
S-corps are limited to 100 shareholders who can hold stock, and those shareholders can’t be partnerships, other corporations or nonresidents.
Other than those limitations, S-corps function like C-corps. S-corps operate independently, giving business owners strong protection from personal liability. They must follow filing and operational requirements.
What is a C corporation?
Corporations, including C-corps, provide the strongest liability protection for business owners of any business entity because the company acts separately from shareholders. There’s no limit on the number of shareholders who can own stock in the company, which allows corporations to raise capital through the sale of stock.
C-corps are subject to double taxation — the corporation itself owes corporate taxes, and shareholders must pay taxes on dividends they receive.
Business owners must form C-corps — as well as S-corps — at the state level. Articles of incorporation must be filed with the state’s secretary of state office. After forming, ongoing C-corp requirements include:
- Filing an annual report or statement of information with your state’s secretary of state
- Writing bylaws to govern the company
- Maintaining corporate minutes from all shareholder meetings
S-corp vs. C-corp: Overview
Here’s an overview of the differences between S-corps and C-corps.
|Taxation||The company’s profits or losses are passed through proportionally to shareholders, who must then report the income on a Schedule K-1 with their personal tax return.||The company pays taxes once on the business’s profit at the corporate rate. Tax is again assessed when the shareholder receives a dividend and reports the amount as income on their tax returns.|
|Shareholder rights||All shareholders hold the same class of stock. A shareholder’s voting power is directly tied to the stock they hold. Shareholders also have the right to receive disbursements, or a share of the company’s profit.||Shareholders may have different rights, depending on the class of stock they own. If a shareholder owns preferred stock, they generally don’t have voting rights but are entitled to receive dividends before common shareholders.|
|Ownership||Can have no more than 100 shareholders. All the shareholders must be U.S. citizens. The owners can’t be other partnerships or corporations.||Can have an unlimited number of shareholders who don’t have to be U.S. citizens or residents. There are no restrictions on the kinds of people or entities that can purchase stock.|
S-corps are taxed at the individual level after profits and losses are passed through to shareholders’ income. Owners of S-corps may deduct up to 20% of their qualified business income. However, some service-based businesses, such as law firms or accounting practices, may not be eligible for the pass-through deduction. S-corps that produce tangible goods, such as food items or office supplies, are more likely to be eligible.
To elect to be taxed as an S corporation, you’d need to submit IRS Form 2553 after forming your corporation. All shareholders must sign the form to agree to the election and disclose their ownership percentage or number of shares. You must make the election no more than two months and 15 days after the beginning of the tax year in which you want the election to take effect, or anytime in the preceding tax year.
C-corps must pay a flat federal corporate tax (21%) on business income. C-corps use IRS Form 1120 to file corporate income tax. Shareholders must also pay taxes on their dividends, resulting in double taxation. C-corp shareholders can’t deduct any losses.
No more than 100 shareholders can have ownership in an S corporation. All shareholders must be U.S. citizens, and other corporations or partnerships can’t act as shareholders.
S-corps are only permitted to issue common stock, as opposed to offering multiple types, such as preferred stock or bonds. The limitations on the type of stock and number of shareholders could hinder an S-corp’s efforts to raise capital through the sale of stock.
C-corps aren’t limited in how many shareholders can hold stock in the company, or the different types of stock the company may sell. C-corps are better suited to raise capital through stock sales than S-corps. Depending on what type of stock the corporation offers, not all shareholders may have voting rights.
Because of the restricted number of shareholders, S-corps can’t become public companies. If you aim to go public at some point, you would need to structure your business as a C-corp.
The unlimited number of shareholders and various types of stock that C-corps can offer makes this structure ideal for public companies. C-corps may have an easier time attracting shareholders than S-corps.
S-corp vs. C-corp: Pros and cons
The entity you choose for your business would depend on several factors, such as your long-term goals for the company and how you prefer to pay business taxes. Consider these benefits and drawbacks when deciding between an S-corp and a C-corp.
S corporation advantages
No corporate tax
Independent from owners
Limited personal liability
S corporation disadvantages
No preferred stock
No more than 100 shareholders
Subject to state income taxes
C corporation advantages
Stock options attractive to investors
Can claim deductions for charitable contributions
Limited personal liability
C corporation disadvantages
Double taxation on profits
Shareholders can’t deduct losses
Corporate taxes at the state level
S-corp vs C-corp: Tax tips
Consider individual and corporate tax rates. As discussed, C-corps owe corporate taxes at a 21% rate. S-corp income is taxed at the individual tax rate — the top tax rate is 37% for individual taxpayers. However, C-corp shareholders are also taxed on their own dividends, so business income is taxed twice.
Check state-level corporate tax rates. The majority of states levy a corporate income tax. Flat C-corp tax rates range from 2.5% in North Carolina to 12% in Iowa. Some states, like Tennessee and Texas, tax S-corps the same as C-corps. Additionally, S-corp shareholders would be subject to state personal income tax on passed-through profits. No matter what kind of corporation you operate, you’d likely be taxed in some way at the state level.
Consult a tax professional. Miscalculating corporate or personal taxes could result in fines from the IRS. Meet with a financial planner or tax advisor if you feel hesitant about preparing for tax season as an S-corp or a C-corp. For instance, you may need extra guidance when determining if your business income qualifies for the pass-through deduction, which doesn’t apply to all S-corps. For example, some service-based S-corps may not be able to claim the deduction.
LLC vs. S-corp vs. C-corp
A limited liability company, like a corporation, offers certain liability protection for business owners. LLCs operate separately from owners, who are referred to as members. LLCs can choose how to be taxed — either as a pass-through entity, partnership or corporation. LLCs are also less expensive to form than either an S-corp or a C-corp, which require costly state filings to get up and running.
Check out the differences between LLCs and corporations at a glance:
|Ownership||1 or more people referred to as members||1 or more, but no more than 100 shareholders||Unlimited number of shareholders|
|Taxes||Personal or corporate taxes||Personal taxes||Corporate taxes (company) and personal taxes (shareholders)|
Can an S-corp own a C-corp?
S-corps can own 80% or more of the stock of a C-corp. C-corps don’t face restrictions on the types of shareholders that can have ownership of the company.
Can I convert an S-corp to a C-corp?
Yes, the IRS allows businesses to revoke their S-corp status and become a standard corporation. You would need to submit a statement of revocation that includes all shareholders’ names, addresses, tax ID numbers and number of shares, as well as the signatures and consent of all shareholders who own more than 50% of the stock. You’d submit the statement to the IRS service center where you file your annual return.
How much will it cost to run and form a corporation?
Pricing will depend on the state in which you choose to incorporate. The corporation will also need to meet certain requirements that are likely to cost some amount — for example, hiring a lawyer to help draft bylaws or recruiting a staff member to organize and maintain notes for every shareholder meeting.
The corporation may need to hire an accountant to help file more complex tax forms or create and submit its annual reports to the secretary of state. The total cost to create and maintain a corporation will depend on the cost of these elements, in addition to any periodic business registration, licensing and permit renewals.
Do I need an attorney to form a corporation?
You don’t need to hire an attorney, but it is a good idea, since forming a corporation with shareholders can be a complex process. You can complete articles of incorporation without the help of a lawyer, but it’s advisable to consult with a corporate attorney to identify and assist you in navigating the tax and legal requirements a corporation must follow.