S Corp. v. C Corp.

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S Corp. v. C Corp

When a business is formed as a corporation, the business owners must choose whether the business should be a C corporation (C Corp) or a S corporation (S Corp). The C Corp is the standard corporation. In order to become an S Corp, however, one must elect to be taxed under Subchapter S of the Internal Revenue Code.

The C Corp and S Corp share many similarities. They both have limited liability protection, both are created with the same state filings, both follow corporate formalities, and both share the same structure of shareholders, directors, and officers. Choosing one or the other depends on your business goals.

What are the main differences between them?

1. Taxes.

S Corp: A S Corp is considered a “pass-through entity.” Therefore, income tax is not paid at the corporate level. The income is instead reported on the owners’ personal tax returns. Taxes are paid by the owners at the individual level. S Corps avoid double taxation.

C Corp: The C Corp is not a pass-through entity. The income of the corporation is taxed at a corporate level. If dividends are distributed, income is then taxed at the individual level as well.

2. Ownership.

S Corp: A S Corp cannot have more than 100 shareholders and can only have one class of stock. Any and all shareholders must be U.S. citizens/residents. Shareholders cannot be other corporations, LLCs, or partnerships.

C Corp: There is no restriction on the number of shareholders for a C Corp. There is also no restriction with regards to stock as C Corps can have multiple classes. 

In order to convert from a C Corp status to a S Corp status, a 2553 Form must be filed with the IRS. If a corporation chooses to convert from a S Corp to C Corp, perhaps due to a growth in shareholders, it can be done by formally revoking the election or doing something the S Corp is ineligible to do, such as selling shares to a corporation shareholder.

There are several advantages and disadvantages to the S Corp and C Corp. You should consult with an attorney and/or accountant for advice on which entity is most beneficial for your individual situation. This post is only intended to be informative and is not a substitute for legal advice.