S-Corp vs. C-Corp: Definitions & Differences

ByVladana Donevski
April 20,2022

Introduction

S-corp and C-corp are used to describe different business structures and refer to the tax status of a company. Also known as S-corporations and C-corporations, these structures also determine liability protections for the owners of each organization. The following guide defines both C-corp and S-corp and compares the two tax designations.

What Is a Corporation? 

Both C-corps and S-corps are legal business entities where the shareholders aren’t personally liable for the debts of the company. These corporations are set up by filing Articles of Incorporation in accordance with local laws. The owners are defined as shareholders. A shareholder’s responsibility is limited to their investment in the business. A company registered as a corporation will also usually have directors and officers who run the business.

When it comes to tax categories, C-corp is a default tax classification for corporations. However, companies that meet certain eligibility requirements can also choose S-corp taxation as an alternative. 

C-Corp Definition

Before we discuss the differences between S-corp and C-corp and analyze the pros and cons, it’s important to understand the broader definitions of these two structures. C-corp is the standard tax category for corporations. This is the most common corporate tax status and meets specific Internal Revenue Code requirements.

Within this structure, owners or shareholders are taxed separately from the corporation. The shareholders pay a personal income tax, and the corporation is taxed independently. But this also means that the owners are effectively paying a double tax because the government taxes the company’s earnings and the owners’ personal income.

S-Corp Definition

S-corp refers to a corporate tax structure that offers an alternative to C-corp taxation. Rather than paying taxes on personal income along with a federal corporate income tax, the S-corp classification means that the corporation can pass income, losses, and deductions to shareholders to file on their personal tax return. S-corp is classified as Subchapter S of the IRS tax code. Businesses must meet certain criteria to become an S-corporation. 

How Do C-Corporations Work?

The C-corp tax class is the most common type of tax status. In other words, most corporations are C-corporations. Once you have an Employer Identification Number or EIN, the IRS taxes both individual and corporate dividends. That’s why C-corp taxes are commonly referred to as a form of double taxation, as owners aren’t permitted to write off corporate losses to offset earnings when filing personal income statements. 

How Do S-Corporations Work?

S-corp taxes don’t include a federal corporate income tax. If a corporation is registered as an S-corp, the company passes its income, credits, deductions, and losses to shareholders. The shareholders include income and losses on their personal tax returns and pay an income tax. With this system, shareholders are only taxed once. 

S-Corp vs. C-Corp: What’s the Difference?

We’ve already touched on the key difference between a C-corp and S-corp business structure. But it’s beneficial to delve deeper into how these tax structures impact different companies. 

Formation

For starters, there are several important differences during the business formation process. 

How to become a C-corporation: After choosing an unregistered business name, you can set up a new entity by filing the Articles of Incorporation with the relevant Secretary of State. The business must appoint a board of directors, while those who purchase shares become owners/shareholders and pay personal income and corporate taxes. 

How to become an S-corporation: Launching an S-corp also requires the business to have a legal name. Owners have to submit the Articles of Incorporation, obtain an EIN by filing IRS Form SS-4, and apply for all relevant permits. Additionally, any business that chooses to become an S-corporation or wants to switch from the default C-corp designation is required to file Form 2553 with the IRS. This form has to have all the details about the fiscal tax year and the signatures of all the shareholders. 

There are certain criteria companies have to meet to become S-corporations, including:

  • Have between one and 100 shareholders
  • The shareholders cannot be nonresidents, partnerships, or other corporations. 
  • Have only one class of stock

Filing Tax Returns

C-corporations file quarterly returns, while S-corporations file annual returns. 

Additional Considerations

It is also beneficial to note the differences in shareholder requirements between C-corps and S-corps. The number of shareholders is unlimited if your corporation is a C-corp. Meanwhile, the maximum number of shareholders at an S-corp is 100. It’s also important to be mindful of the IRS eligibility requirements for shareholders, one of which doesn’t permit nonresidents.  

The table below offers a more comprehensive look at the differences between S-corporations and C-corporations:

 

C-corp

S-corp

Formation process

Default tax structure: formed through Articles of Incorporation Articles of Incorporation + IRS Form 2553

Taxes

Double taxation: personal income tax + corporate tax Single taxation: personal income tax

When are taxes filed?

Every quarter Every year

Number of shareholders 

Unlimited Limited to 100

Types of shareholders

Anyone who is eligible Individuals + eligible estates, trusts, and organizations that are tax-exempt

Shareholder location

Domestic and international

Domestic only

Stock class

Multiple One class

IRS scrutiny level

Standard Above average

Raising equity

Easier

More difficult

S-Corp Pros and Cons

Before deciding which business structure is most suitable for your company, it’s important to weigh the pros and cons. Below are the main advantages and disadvantages of an S-corp tax status. 

S-corp advantages:

  • The main advantage of S-corps is their adherence to the pass-through taxation system that allows shareholders to avoid double taxation and only pay a personal income tax. 
  • In some cases, the company’s losses can be passed on to owners. 
  • S-corporations only file tax returns once a year.
  • Reduced taxable gains
  • Limited liability for owners and employees

S-corp disadvantages:

  • S-corp shareholder limit of 100 
  • There are stringent requirements for shareholders, who must be US residents and cannot be partnerships.
  • Only one class of stock allowed
  • It’s more difficult to raise equity because S-corps tend to be less appealing to investors, such as venture capitalists.
  • More intense scrutiny from the IRS

C-Corp Pros and Cons

C-corp advantages:

  • Limited liability for shareholders, employees, officers and directors
  • No limit on number of shareholders 
  • Shareholders can be either domestic or international.
  • Easier to raise equity than with S-corporations
  • More than one class of stock allowed
  • Lower tax rate

C-corp disadvantages:

  • Double taxation system which includes a corporate income tax and a personal income tax for shareholders.
  • Gains and losses cannot be passed to shareholders, which means that they cannot write off losses on their personal tax returns. 
  • May be more time-consuming to manage due to the rigid structure of the corporation. 

What Business Would Benefit From Being An S-Corporation?

The outcome of the showdown between S-corp vs. C-corp ultimately comes down to your individual needs. Some corporations are better suited for the former. Here are some scenarios when the advantages of the S-corporation status may outweigh the disadvantages:

  1. You do not plan to have more than 100 shareholders or any investors that don’t meet the eligibility criteria.
  2. You don’t plan to issue preferred stock to shareholders.
  3. All your shareholders are based in the US.
  4. You plan to distribute income to shareholders.

C-Corp vs. S-Corp Tax Advantages: When Is C-Corp the Best Option?

You may wish to consider sticking with the default C-corp tax structure if the following circumstances apply to your business:

  1. C-corp taxes would be lower for your business than S-corp taxes.
  2. You plan to launch an IPO.
  3. You are looking for investors who may not be eligible for S-corporation investments.
  4. You have more than 100 shareholders, or some of your shareholders are from overseas.
  5. You want to make shares freely transferable.
  6. You plan to offer shareholders access to preferred stock.

Exploring Other Options

C-corps and S-corps offer a range of benefits for businesses, but they are not the only options for companies. There are other types of corporations and additional structures to consider. 

Other types of corporations include:

  • Benefit corporations: These are also known as B-Corps and public benefit corporations or PBCs. The designation is held by for-profit companies that balance their responsibilities to shareholders with social and environmental performance. This is a state and not a federal designation, and it’s available in most states. Most B-corps are also C-corps, but they can apply to become S-corps. 
  • Nonprofits: These entities become corporations for reasons that are not linked to generating profits. Nonprofit corporations are eligible for federal and state tax benefits. 

Alternative business structures to explore:

  • Limited liability company or LLC: LLCs are often considered the middle ground between corporations and partnerships. LLCs can be taxed in the same way as C-corps or S-corps but are not governed by the same rules and regulations. LLCs are often easier to run for small business owners.
  • Sole proprietorships: Sometimes known as sole traders, sole proprietorships are regarded as the simplest and most flexible option for small business owners. With a sole proprietorship, the owner is only taxed at a personal level. This structure does not have shareholders and doesn’t allow stocks to be sold. 
  • Partnerships: This structure involves an agreement between two or more people who are also taxed on a personal level. Business owners may also want to consider limited liability partnerships or limited partnerships. 

LLC vs. C-corp vs. S-corp

When setting up a new business or exploring options for an existing one, it’s helpful to look at the different structures and how they impact companies. Here are some key takeaways from the S-corp vs. C-corp vs. LLC comparison:

Formation

Forming an LLC involves choosing a business name, assigning a registered agent, filing Articles of Organization, drawing up an operating agreement, and applying for an EIN, also known as a  federal ID number. Once you’ve completed these processes, you’ll need to submit business licenses and permits and open a bank account. To form a C-corp, you’ll need to file the Articles of Incorporation. To become an S-corp, there is an additional IRS form to complete. 

Taxes

LLCs can opt for S-corp taxation, in which case the businesses avoid double taxation. C-corporation status is effectively a double tax, which combines a corporate and personal income tax. 

Management

Setting up and running an LLC is often simpler than managing C-corps and S-corps. This is why small business owners are often advised to consider an LLC or a sole proprietorship. 

Shareholders

C-corporations can have unlimited shareholders both in the US and overseas. S-corporations are limited to 100 shareholders. Shareholders must be US citizens and must also satisfy strict eligibility criteria. LLCs have members rather than shareholders. 

Profits

One major difference between an LLC and a corporation is that the former can be a pass-through business, while S-corporations are not. That means that all profits and losses are passed through to individual LLC owners, whereas S-corp profits are held by the corporation.  

LLC vs. Sole Proprietorship

A sole proprietorship is a business with a single owner who takes sole responsibility for the running of the company. There are no shareholders, and there is no legal separation between the proprietor and the business. 

Meanwhile, an LLC is a legal business entity that can be created by a single person or a group of people. The LLC structure combines elements of corporations and partnerships, and it provides a lot of flexibility for business owners. 

Here are some of the key differences between a sole proprietorship and an LLC:

  • Formation: To form an LLC, you must file Articles of Organization, obtain the relevant licenses, and register your business name. To form a sole proprietorship, you simply need to obtain the relevant permits and register your name.
  • Management: Multiple people can make decisions within an LLC. On the other hand, a single owner is responsible for making decisions with a sole proprietorship. 
  • Taxes: Both entities have a pass-through tax structure. However, an LLC can opt for corporate tax status. 
  • Liabilities: A sole proprietor is liable for business debts, while those who own an LLC are not. 

The Best Option 

There is no one-size-fits-all when it comes to selecting the appropriate business structure. That’s why it’s critical to take the time to research different options and compare the pros and cons of S-corps and C-corps. 

Whether you are new to the corporate world or your objectives have changed, identifying the right avenue when registering your business will help you save money on taxes and provide you with the necessary liability protection.

Frequently Asked Questions
How many shareholders can an S-corporation have?

Unlike C-corporations, S-corps can have a maximum of 100 shareholders. It is also important to note that there are stringent eligibility criteria for S-corp shareholders. For example, shareholders must be US residents. On the other hand, C-corporations can have an unlimited number of shareholders, including individuals from overseas.

Is LLC or S-corp better?

An LLC can be an S-corporation. An S-corp is suitable for businesses that wish to avoid double taxation and give out corporate dividends to shareholders. If an LLC chooses a C-corp designation, it won’t have restrictions on the number of shareholders but will be subject to corporate and personal income taxes.

Who pays more taxes LLC or S-corp?

If an LLC is taxed as a sole proprietorship, it pays higher taxes than S-corps. Sole proprietorship owners have to pay a self-employment tax on their profits. With an S-corporations, owners can reconfigure the amount that is subject to the self-employment tax.   

Should I Make My LLC an S-Corp?

It is possible for business owners to have an LLC taxed as an S-corp. There are advantages and disadvantages of making an LLC an S-corporation. The pros include saving money on taxes through paying yourself a salary and distributing dividends to shareholders. Tax rates on dividends are lower than salaries. The downsides to consider are a salary cap, which means that you can only pay yourself a set amount of money and limitations on shareholders and stock class.

Why would you choose an S-corp?

In the S-corp vs. C-corp showdown, the former emerges as the better option if you don’t have more than 100 shareholders and want the pass-through taxation system. With S-corp, income is only taxed at the individual level. With C-corporation, there is a double tax system, which combines personal income tax and corporate tax.

Why does S-corp status exist?

The major benefit of S-corp status is not having to pay federal corporate taxes. Many people can save money by opting for S-corp tax status, particularly when the business is in its early stages. The S-corp tax status is referred to as pass-through taxation, enabling individuals to write off losses on a personal tax return. It is possible to turn an LLC into an S-corp. If you are thinking of taking this step, it’s a good idea to consult tax experts and explore how modifying your tax status would impact your tax returns.

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If you were just to observe an office where an independent contractor and an employee were working side by side, you’d be hard-pushed to see any difference between them. Both would be typing at computers, going to meetings, and using the bathroom.  Even so, they’re not the same. There are both practical and legal differences between them.  In this post, we ask: Independent contractor vs. employee – what’s the difference? We then explore the pros and cons of each and some of the penalties you might face if you classify workers incorrectly.  Employee vs. Independent Contractor Employees are defined as workers on the company’s payroll who receive regular wages and benefits in exchange for loyalty to the organization. An employee, for instance, can’t work for both Citigroup and JPMorgan at the same time. 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If they remain for many years, the IRS may interpret that as a sign that they are actually employees.  Is the worker paid monthly? Another sign that a worker is an employee is if you pay them a set amount monthly instead of on a “per project” basis. The IRS may view such payments as being suspiciously similar to a regular salary.  Does the company pay for travel? Companies will usually pay for employee travel costs because they can deduct them from their expenses. Independent contractors, on the other hand, are usually required to pay for their own transport. If companies pay for contractor transport, the IRS might consider this evidence they are actually de facto employees.  In summary, knowing the right classification for your workers is essential. If you misclassify, you may have to pay both back taxes and fines to the IRS. The size of the bill will correspond to the number of Form W-2s that you failed to file because you didn’t correctly classify an independent contractor as an employee.  Furthermore, if the IRS believes you deliberately and persistently misclassified workers, you may face criminal penalties. These could include fines, jail time, and damages litigation by workers.  Employee Pros and Cons Let’s take a look at some of the positives and negatives associated with hiring an employee.  Pros of Hiring Employees Part of a team and often want to go the extra mile to advance their careers A sense of loyalty and duty toward the firm Able to perform routine tasks over long periods Can take on extra work when the need arises Cons of Hiring Employees Training and professional development can be expensive Salaries must be paid like clockwork, regardless of the business’s cash flow position Perks and other employee-related expenses can add to the cost of hiring Recruitment and interview processes can take a long time Pros and Cons of Independent Contractors Now, let’s take a look at some of the pros and cons of independent contractors:  Pros of Hiring Independent Contractors Save money overall because you’re not committed to paying any benefits or salary Easily hire the right person for the task without the need for additional training Gain greater flexibility; if a contractor isn’t a good match, there’s no need to hire them again The contractor takes care of all the permits and licenses they need; it’s not the business owner’s responsibility Cons of Hiring Independent Contractors Some loss of control over how they perform tasks Difficulty closely monitoring their work and assessing the quality of their contributions Lack of company loyalty Independent contractors own the copyrights to their work unless you write up an agreement stating otherwise Hired short-term and may require administratively costly re-hiring in the future Conclusion Essentially, the difference between an independent contractor and an employee comes down to the relationship of the worker to the firm hiring them. If they receive regular wages, follow instructions of senior managers, and work at the employer’s place of business, then they are probably an employee. However, if they work relatively independently, don’t receive benefits from the employer, and operate remotely, then they are more likely to be a contractor.  Correctly classifying workers is essential. Failing to do so properly can result in having to pay hefty back taxes and fines to the IRS. Furthermore, wrongly classified employees may litigate against you. 
By Julija A. · April 20,2022
As a business owner, you will be expected to produce three primary financial statements for each accounting period. Given that they each have a crucial role in tracking your company’s financial performance, you’ll need to be able to compare a balance sheet vs. an income statement and know what a cash flow statement is. Whether you’ve just launched your business or want to play a more active role in handling your accounts and financial reporting, this guide will provide the info that you’ll need. An Explanation of Balance Sheets and Income Statements There are over 32.5 million businesses in the US, and they all need to satisfy their obligations for accurate financial reporting and accounting. Before looking at a balance sheet example or a sample income statement, you must first know what they are and how they function. The basic definitions of the main types of financial statements are as follows: Balance sheet: a balance sheet provides a snapshot of the company’s financial health at any given moment. It will detail its assets and liabilities to calculate equity and your ability to cover financial exposures. Income statement: an income statement details the company’s total revenues and expenses over an extended period to underline the company’s overall performance and profitability. Cash flow statement: the cash flow statement details all the monies received by the company, which covers operations, investment, and financing from ongoing operations and external investments.  While all financial reporting tools are used to determine where the company stands from a financial perspective, there are distinct contrasts in what they are used for. For example, balance sheets detail what the company owns and owes to see how effectively debt is used to leverage success. Conversely, an income statement tracks both revenue and expenses to outline whether the company is operating in a way where income outweighs the outgoing expenses. A cash flow statement checks that capital is available. This is a crucial consideration since over a third of small businesses in the US claim they need more cash to operate better. In other words, it’s not about the usefulness of a  balance sheet vs. income statement accounts; it’s about using both of these financial tools together with cash flow statements to get a better picture of a company’s financial health. What Is Included in a Sample Balance Sheet? Before learning how to read a balance sheet, you will need to know what is included on it and what each aspect relates to. Even if you use the best tax software on the market, this knowledge will be vital for extrapolating crucial information. A balance sheet will show your: Assets include account balances across checking and savings, accounts retrievable from what people owe you, fixed assets like equipment, inventory, and intangible assets like copyrights. Liabilities include accounts payable to other companies and both current and long-term liabilities.  Equity - this covers all aspects of the shareholder equity, including net assets, revenue, and invested capital. Recording all assets and liabilities and placing them into their categories, such as current and long-term assets/liabilities, will enable easy reading of the accounting balance sheet. Any such sheet will need to cover five key areas: Current Assets All current assets (highly liquid assets that can generate value within 12 months) should be listed in the first part of the balance sheet. Some of the items that may be listed in your account include: Cash reserves Short-term investments Accounts receivable Inventories The top of this list should include a “Total Current Assets” figure. Long-Term Assets The second section should cover the long-term assets, which are low liquidity items that offer their value in a year or more. Some examples are:  Long-term investments Property and land Long-term equipment Intangible assets The top of this section should include a “Total Long-Term Assets” figure. Current Liabilities The next section will list current liabilities, which are due within the next 12 months. Examples include: Accounts payable to suppliers Accrued liabilities like employee tax withholdings Unearned revenue A “Total Current Liabilities’ figure should be added to the top of this section. Long-Term Liabilities Next up is the liabilities that are not due soon. This section should  include the following: Long-term debt from bank loans Wages, taxes, and dividends Rent and utilities The “Total Long-Term Liabilities” figure should be added too.  Shareholder’s Equity The final section of the balance sheet should detail the following: Retained earnings that are reinvested or used to pay off debts The shareholder equity, which is assets - liabilities.  With all of these sections completed, the balance sheet will be ready to file. What Is Included in a Sample Income Statement? Any good Income statement example should give a clear insight into the financial performance of the company over a longer period. This is because it details both expenses and revenue. It will usually include the following data: Net Sales This figure is pretty self-explanatory and covers the revenue gained across all channels. Other Income This refers to income that falls outside of revenue from sales. When added to the net sales, it should provide a “total revenue” figure. Costs of Goods Sold After the revenue figures, the income statement will list the cost of producing goods, including related services. General Admin Costs Next, it will be necessary to detail the expenses not directly linked to your production costs. This can be followed by depreciation and amortization to gain a ‘total costs and expenses’ figure. Operating Income This figure comes directly after the total costs and expenses. It details the profits made through business operations after subtracting wages and depreciation. Net Interest Expense This covers the company’s debt servicing cost and may be added to loss on extinguishment of debt. This cumulative figure is then subtracted from the operating income to show the pre-tax income, followed by a line to show the tax payment or benefit. Net Income  Finally, the net income will confirm the company’s profits or losses for the period in question. As with all figures in the financial reporting documents, a number displayed in brackets indicates a negative value. A Closer Look at the Difference Between an Income Statement and a Balance Sheet Both documents can be very useful for your in-house financial management practices, and both will be scrutinized by accountants, investors, and partners. However, one of the main differences is that the income statement is dedicated to analyzing the company’s performance over a period of time, while a balance sheet looks at what the company currently possesses to confirm that it can meet its obligations. It should also be noted that the income statement has to come before the balance sheet. You cannot work out the equity without first knowing whether your income outweighed the overheads or vice versa. The numbers detailed in the income statement will be included in the balance sheet, but it also adds assets and liabilities that were not covered in the income statement. But while the income statement feeds into the balance sheet and contributes to the statement of the owner's equity, you should not fall into the trap of thinking that the latter is more important. Ultimately, it is the income statement that first shows whether the company is performing well or needs to address issues.  Likewise, this will be one of the most important features when considering expansions or major investments - because a company that isn’t already doing well shouldn’t be thinking about expansion. Final Words As far as financial reporting is concerned, both the balance sheet and the income statement help explain the company’s financial standing. Understanding the relationship between an income statement and a balance sheet will put your company in a far stronger position. When utilized well, they won’t just help you comply with legal obligations but also help the accounting process and facilitate making better decisions.
By Julija A. · April 20,2022

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