What is the difference between a C Corporation and S Corporation?

If you have been contemplating creating a business entity as a corporation, an important decision will be deciding whether to set it up as a C-Corporation (C-Corp) or S-Corporation (S-Corp).  This decision will affect how much taxes you and/or your business will pay, your ability to raise funds, and the potential to expand your business. 

An important thing to note is that an S-Corp is not an entity in itself but a tax election. One can register a business entity, such as a C-corporation or a limited liability company, and choose that either be taxed as an S-Corp.

There are three main differences between a C Corp and S Corp:  

  1. Process:  One of the main differences is that the C-Corp is the default tax status the IRS assigns to corporations when you file for registration.  If you decide to choose the S-Corp election, then you must take the extra step by filing IRS Form 2553 after incorporating. 
  2. Taxes:  Another difference, and probably the main reason many incorporators choose to make the S-Corp election, is that C-Corps are subject to double taxation.  This means C-Corps pay federal income taxes on net income at the corporate level and then the shareholders pay federal income taxes again on their personal income tax returns on any dividends received.  S-Corps, however, do not pay taxes.  Instead, profits flow untaxed directly to the owners who pay income taxes on their personal tax return.  If there are losses, those also pass to the owners who can use them on their individual returns to shelter other sources of income received.  C-Corps do not have the ability to pass on losses to their shareholders. 
  3. Ownership:  Another big difference is that C-Corps can have an unlimited amount of shareholders, while S-corps are capped at 100 shareholders, none of which can be non-resident alien shareholders.  C-Corps can also offer various classes of stock.  S-Corps can only have one class of stock. 

Understanding the differences between remaining as a C-Corp or choosing to make the S-Corp tax election can affect your business’s bottom line.  Whether you want to save money on taxes or have the need to raise investor money in the future, those factors will influence which corporation you should choose.  Creating a corporation is a big decision.  If you are unsure on which structure to choose, call our offices for a consultation so we can get you started with your best interests in mind. 

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