Difference Between S Corporation and C Corporation
As per the IRS, C Corp is the default nature of companies i.e. they have to pay regular income tax on profits and any dividends made shall also be taxed accordingly whereas S Corp will follow pass-through taxation procedure under which its profits shall be taxed only once, but it has to follow a stricter rules which can act as limitations for economic growth of that company.
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Source: C Corp vs S Corp (wallstreetmojo.com)
If you are looking to set up a business by incorporating an entity in the U.S., then you will be required to decide between two choices – C Corp vs S Corp. The question now arises why? The answer is per Internal Revenue Code (IRS) where it defines S Corporation as any business that makes choice to pass on tax liability on its shareholders.
Under C Corporation entity is taxed separately from owners or shareholders. While incorporating the C Corporation you will be noticing that – nowhere on its Articles of Incorporation does it mention these types of corporations. The state corporation law that you form under doesn’t distinguish between C Corp or S corp. It’s the I.R.S that distinguishes, not the state corporate office.
For S Corp the owners i.e., shareholders are supposed to report their income and losses on their personal tax returns, where they will be assessed at an income tax rate at an individual level. When this occurs, the corporation’s income is not taxed at both the shareholder level and the corporate income level, so double taxationDouble TaxationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level.read more is avoided. For e.g., Jacks, Inc. formed as an S corporation in Florida state where Robert owns nearly 51% of the corporation, and Brenda owns nearly 49%.
C Corp vs S Corp Infographics
Let’s see the top differences between C Corp vs S Corp.
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Key Differences
- The major key difference is that S Corporation is pass-through tax entities whereas C Corp is separately taxable entities. Hence as mentioned earlier C Corp faces double taxation and for S Corporation any tax due is paid at an individual level by the owners’ pro-rata basis.
- The shareholder’s limit is 100 for S Corp while there is no limit for C Corp.
- C corporation will be required to hold at least 1 meeting every year for shareholders and directors whereas S Corporation is also required to hold scheduled meetings of directors and shareholders.
- Foreigners can’t be shareholders for S Corporation as per the IRS requirement while there is no such requirement for C Corp.
- Income and losses are required to be allocated according to the % of ownership for S Corp whereas there is no such requirement for C CorporationC CorporationAccording to US tax laws, any corporation that is not a S corporation is considered a C corporation, which has a different legal status and is taxed accordingly. It has its own articles of incorporation that defines its activities and is held by the shareholders, while its liability is limited.read more.
- C Corporation is a type of structure where there are no limits on shareholders and allows issuance of multiple classes of stock and while for S Corporation you can only issue one class type of stock.
- For S Corp the business income which is taxable can be split into 2 components —distribution income and salary income, where, only the salary part will be liable to self-employment taxSelf-employment TaxSelf-employment tax is the tax towards social security and Medicare, paid by a self-employed person who has net earnings of $400 or more for the concerned tax period towards the federal government reported through form 1040 schedule SE.read more, thus helps in reducing the overall tax burden. No such differentiation is required in C Corp.
- Per IRS, “Generally, an S corporation is exempt from federal income taxesFederal Income TaxesFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more except for the capital gains taxes and passive income. It is treated in a similar way as the partnership, in that generally, taxes are not required to be paid at the corporate level.” C Corp pays taxes on all income.
C Corp vs S Corp Comparative Table
| Basis | C Corporation | S Corporation |
|---|---|---|
| Eligibility | No specific criteria for the same however the first step in incorporating a C corporation is to choose an unregistered business name and register the same. According to applicable state laws, the registrant will file the articles of incorporation with the state Secretary. C corporations offer stock to its shareholders, who, upon purchase, will become owners of the corporation. | Must Meet Following requirements: 1) Domiciled in the US. 2) <=100 Shareholders 3) Only One Class of stock can be issued 4) Cannot include: Partnerships, certain financial institutions, insurance companies, etc. |
| Structure | A legal entity that is taxed separately, and which helps in protecting its shareholders’ assets from creditor’s claim. | Operates like normal partnerships where profit and losses pass through the shareholders. |
| Corporate Formalities | 1) Must file Form SS-4 in order to obtain a unique employer identification number (EIN). 2) They are also required to submit income, unemployment, state, payroll taxesPayroll TaxesPayroll taxes are statutory deductions made by the employer from an employee’s regular salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. These taxes are collected by tax authorities from respective employers and paid for human welfare schemes, infrastructure development.read more to the state. 3) To establish a board of directors in order to oversee its management and operation. | 1) After submitting an Article of associationArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user's guide for executing the organizational tasks, directors' appointment and recording the financial information.read moreArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user's guide for executing the organizational tasks, directors' appointment and recording the financial information.read more or incorporation certificate, all shareholders should sign and submit form 2553. 2) Form the 1120S is required to file the U.S. Corporation Income Tax Return |
| Liabilities | C corporation could have multiple owners and shareholders, but it limits the personal liability of the directors, shareholders, employees, and officers. In this way, the legal obligations of the business cannot become a personal debt obligation of any individual associated with the corporation. The C corporation continues to exist even though its owners change and when members of management are replaced. | An S Corp has a lifespan that is independent. Its longevity is also not dependent upon its shareholders, whether they stay or depart, thus making it easy to do business. There is no personal liability for any shareholder and further no debts of the business also. Creditors also have no claim on the personal assets of their owners i.e. shareholders to settle the business debt. |
Conclusion
The choice of entity structure will have a huge impact on multiple aspects of your business, ranging from financing to taxes to growth strategies. Looking at the differences between your options it may help you to overcome a decision that best suits your business needs and goals.
Features like tax savings and limited liability, the S corporation structure is used by many U.S. companies. When compared with partnerships, S corporations have an edge on aspects like a continuance of business and transfer of ownership. C corporation can be a fruitful business set up. It provides limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more for the business owners, allows comparatively more freedom of stock purchasing, permits tax breakTax BreakA tax break is a tax benefit or tax concession allowed by the government to encourage businesses to increase their investments, ultimately boosting the economy. It comes in a variety of ways, such as claiming tax deductions or excluding profits from tax returns.read more, and other benefits.
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