C Corp vs S Corp: What's the Difference?
Want to incorporate your business but don’t know where to start? This handy guide for C corp vs S corp can help.
As any aspiring business owner knows, starting a new venture can be challenging. There is usually paperwork, setting up software, building customer relationships, getting access to funding, just to name a few givens. But there’s also one not-so-minor detail you’ll need to consider: deciding whether to incorporate. Perhaps you’ve outgrown your sole proprietorship and want to grow your business, or maybe you just want to learn more about corporation types now, so it’s easier to decide down the road.
Whatever your situation may be, we’ve made choosing between a C corp vs an S corp a little bit easier with our guide to both types of business structures. Keep reading for a breakdown of these two corporation types and what each has to offer your small business.
C Corp vs S Corp: Differences?
Although the two corporation types bear many similarities, there are several key differences that impact the way you run your business. We are going to review the following details:
- How the corporation is formed
- Who owns what
How the Corporation Pays Taxes
Here’s the bad news: C corporations are doubly taxed — both corporate income taxes and shareholder dividend taxes. So, when Tax Day comes around, C corporations pay tax on any income earned by the business itself, as well as on any income earned by the owners (in this case, shareholders). But the good news is, C corp taxes do allow deductions on all donations to charity as long as the amount is no more than 10% of the company’s total annual income.
S corporations have single taxation. This means they don’t pay corporate taxes due to their special tax status with the IRS. Instead, they have pass-through taxation, which means the owners (shareholders) file any profits and losses from the business as personal income. A bonus is that, depending on the type of business you have and your total taxable income, your S corp may qualify for a 20% tax deduction, meaning more money in your pocket.
How the Corporation Type Is Formed
If you hate red tape and gobs of governmental paperwork, a C corp might be for you. Forming a C corp is easier than forming an S corp because filing articles of incorporation makes your business a C corporation automatically — well, when they’re approved, that is.
S corporation filing is more form-intensive, requiring much more upfront work. You’ll need to file articles of incorporation plus IRS Form 2553. On top of that, S corp filing requirements may vary by state. Learn more about what other documents you may need to file depending on where you’re incorporating your business.
Who Owns What
C corporations do not have any ownership restrictions. The sky’s the limit when it comes to the number of shareholders and investors in your business. Why is this noteworthy? Selling stock is easier with a C corp because of the few restrictions on who can be an owner. Businesses, partnerships, and trusts — including foreign investors — can all be owners.
Exclusivity is the name of the game with an S corp. The 100-person shareholder limit means you can expect to get up close and personal with the movers and shakers in your business. The limited number of shareholders can be a boon when it comes to ensuring every shareholder has a voice in the company. A limiting aspect of S corps is that they can’t be owned by partnerships, other corporations, or shareholders who are not U.S. residents.
C Corp vs S Corp: Similarities
Because they are both corporations, they share some similarities:
- Limited liability. Both corporation business structure types are separate legal entities from the owners. This means that C and S corp shareholders are not personally responsible for any debt, lawsuits, or other risks accrued by the corporation. If a situation arises in which the corporation cannot pay off a certain amount of debt, the owners’ personal assets are safe.
- Filing. It’s boring, but you have to do it. No matter the corporation type, the business owner must file formation documents called articles of incorporation (or sometimes known as a certificate of incorporation) with the state in which they are incorporating.
- Compliance. State laws about corporations can be applied to both a C and S corp. Although they may look different across both types, all corporations must follow standard corporate guidelines: issuing stock options, holding shareholder meetings, creating corporate bylaws, filing yearly financial reports, and paying annual fees.
- Structure. Both types of corporations are set up to allow shareholders (though, the allowable limit is different), sell stocks, have a board of directors, and create bylaws.
Advantages and Disadvantages
By now, you may have gleaned some of the advantages and disadvantages of each type of corporation, but here is an at-a-glance look at the most commonly regarded pros and cons.
C Corp vs S Corp: Which One Should I File?
Businesses should file as a C corp if they want to go public, have international investors, issue multiple stocks (including preferred stock), and have easily transferable shares. For example, if you have a startup in the tech industry and want to grow quickly with the help of investors, file as a C corp. This will enable your business to expand and eventually become publicly traded, if desired.
On the other hand, it may make more sense to gear up and file the extra paperwork as an S corp if your business plans to stay on the smaller side and not go public.
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