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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As a result, we expect to see a continued increase in online shopping even after the pandemic is over. This shift will have a big impact on the types of products that are being sold online. We can already see new trends in eCommerce - a move away from heavy, bulky items that are difficult to transport and an increase in sales of smaller items that can be easily shipped. This trend is likely to continue as people become more accustomed to shopping online for items that they would traditionally have bought in-store. Another big trend that we’re seeing is a shift from business-to-business eCommerce to business-to-consumer eCommerce. The rise of B2C over B2B is being driven by the fact that many small businesses have had to move their operations online in order to make it through the pandemic. Even traditional businesses that relied on in-person sales are now turning to eCommerce to reach their customers. Manufacturing, healthcare, automotive, and insurance are just some of the industries that are starting to sell directly to consumers online. This new approach and innovative trends in the eCommerce industry might bring some new challenges. However, the benefits are likely to outweigh the drawbacks in the long run. ECommerce Companies Lean More on Augmented Reality The rise of augmented reality has been a game changer in the eCommerce industry, especially in fashion and home furnishing. This technology is being used by some of the biggest names in retail, including IKEA, Dulux, Lego, Sephora, and Nike. AR allows shoppers to see how products would look in their homes before they buy them. This is particularly useful for items like furniture and home décor, where it can be difficult to visualize exactly how something would look in your home space. Following the new eCommerce trends, AR has recently been used to create virtual showrooms and allow customers to try on products before they buy them. This can benefit the clothing and makeup industries, where you need to see how something looks on you before you make a purchase. We expect to see even more retailers using AR in the next few years as the technology becomes more widespread and available to everyone. AI Will Further Personalize the Shopping Experience Artificial intelligence is already being used by many top-rated eCommerce platforms to personalize their customers’ shopping experiences. This is one of the latest eCommerce trends, and it helps businesses learn about customers’ individual preferences and use that information to recommend products based on a customer’s past purchases, browsing history, and search queries. This technology is also being used to create dynamic pricing models that automatically adjust prices based on demand, competitor prices, and other factors. AI can also be used to help businesses manage their inventory and fulfill orders more efficiently. In the future, AI is likely to become even more involved in the eCommerce experience. It will be used to provide customer support, process orders, and handle returns. We may even see robots being used to pick and pack orders in warehouses. The use of AI will enable eCommerce shoppers to have a more personalized and convenient experience. It will also allow businesses to save money on labor costs. Chatbots Will Become More Common Today, customers expect their online shopping experience to be streamlined, so when they encounter a bottleneck or poor customer service, it’s very easy for a potential customer to abandon their cart. This means that eCommerce businesses need to find ways to speed up their fulfillment process. One way to do this is by using chatbots to automate customer service tasks. A chatbot is a computer program that simulates human conversation. Ever since the first chatbot, ELIZA, was created in 1966, the service has been used to provide customer support, answer questions, and make recommendations. Many eCommerce businesses are already using chatbots, and we expect future trends in eCommerce to make them even more common.  For example, a chatbot can be used to answer common customer questions, provide order status updates, and take care of returns. This frees up customer service representatives to handle more complex issues.  In the future, we expect chatbots to become even more involved in the eCommerce experience. They will likely be used to handle a wider range of tasks, including processing orders and payments. As AI becomes more sophisticated, chatbots will become more realistic and able to hold natural conversations with customers more easily. Voice Search Will Become a Big Deal As voice-activated assistants like Amazon Alexa and Google Home become more common, we expect voice search to become more prominent in global eCommerce trends. Voice search allows for voice input, which is faster and often more convenient than typing. As statistics indicate, about 75% of US households will own at least one smart speaker by 2025, making voice search an important factor in eCommerce.  As the use of voice-activated assistants grows and as they become an integral part of eCommerce’s future, we expect businesses will optimize their eCommerce sites for voice search. This means using natural language instead of keywords, including long-tail keywords that are more likely to be spoken than typed, and making sure that product pages are listed when someone searches for relevant keywords. It will also become more critical for businesses to provide concise and accurate information on their product pages. This is because people are more likely to get frustrated with a voice-activated assistant if they have to keep asking for clarification on product descriptions. Conventional Payment Options Will Take a Back Seat As the world becomes more digital, we expect to see a shift from traditional payment methods to newer, more secure methods such as mobile payments and cryptocurrencies. Unlike recent B2B eCommerce trends, this one will have a more profound and lasting impact on the way businesses interact with customers.  With a variety of ways to pay for goods and services online, customers will have more choice and flexibility when it comes to how they make purchases. We expect mobile payments to become more popular as people become more comfortable using their smartphones to make transactions. Contactless payments have become common during the pandemic, and established players such as Apple Pay, Google Pay, and Samsung Pay are likely to benefit from this trend. Cryptocurrency is another payment method that is gaining popularity, particularly among younger generations. Bitcoin payments, one of the major new trends in eCommerce shopping, have been on the rise lately. As more people become aware of cryptocurrency and how to use it, eCommerce customers will have more options when it comes to how they make payments. Headless and API-Driven Commerce is Gaining Momentum Headless commerce is an architecture that decouples the back-end systems from the front-end. This allows businesses to build their eCommerce store using any programming language and framework they want. API-driven commerce is a similar concept, but it takes things one step further by allowing businesses to connect their eCommerce store to any third-party service using APIs, a type of software that allows two applications to communicate with each other. This eCommerce industry trend is gaining momentum because it gives businesses more flexibility and control over their stores. Companies can also get the advantage of the incorporated SEO, content marketing tools, and digital experience features. Finally, back-end developers and front-end developers can work independently of each other, which speeds up the development process. Product Videos Will Become More Popular As broadband speeds continue to increase and more people watch videos on their smartphones, customer engagement through product videos will continue to grow. Short video content is a great way to show off your products in a way that is more engaging than traditional product photos. They are also a great way to showcase how your products can be used in real-world scenarios directly from your eCommerce store. Unlike photos or descriptions, video content can quickly grab a viewer’s attention and give them an idea of what your product is all about. If you want to stay ahead of the curve, you need to start thinking about how you can use video content to showcase your products or services effectively. Conversion Strategies Will Focus on Building Trust In order to convert leads into customers, businesses need to focus on building trust. Multi-channel selling, Facebook advertising, and Instagram marketing are great ways to convert leads into customers, provided you focus on building trust with your target audience.  As recent online sales trends indicate, consumers are more and more skeptical of advertising and are looking for brands they can have confidence in. This can be achieved in a number of ways, such as by displaying customer testimonials and reviews, social proof, and security seals. Another way to build trust is to offer a money-back guarantee or free shipping. This shows that you are confident in your product and that you are willing to stand behind it. Finally, focusing on transparency (e.g., disclosing your business practices, the manufacturing process, etc.) and building a strong social media presence can also help any business in the eCommerce industry build trust with potential customers. Big Data is a Game Changer Big data is a term used to describe the large volume of data that businesses now have access to. This data can come from a variety of sources, such as social media, website analytics, CRM systems, and more. Big data can be used to improve the customer experience in a number of ways, such as by personalizing the experience, identifying customer pain points, and improving customer service. We've all experienced seeing suggestions on shopping platforms or search engines, and most of us have found them to be pretty accurate. The more data a company has, the better it can cater to its customer's needs, and this will become increasingly important in future eCommerce trends. However, big data carries big challenges as customers are more and more concerned about data privacy. So, businesses need to make sure they are handling customer data responsibly and transparently if they want to keep using it to boost profits. Mobile Commerce Will Continue To Grow Mobile commerce is expected to continue growing in the coming years. According to statistics, mobile devices are used for over 40% of online transactions, their rising popularity indicates that this is one of the trends in online shopping that’s here to stay. Mobile commerce offers a number of advantages for businesses, such as increased reach, shorter buying cycles, and improved conversion rates. It also offers many advantages for customers, including the ability to shop anywhere at any time. If you want to stay ahead of the competition, it’s important to make sure your eCommerce platform is mobile-friendly. This means having a responsive design that looks good on all devices, as well as providing a smooth and easy-to-use mobile shopping experience. Omnichannel Selling Will Become the Norm Omnichannel selling is a term used to describe the practice of selling products through multiple channels, such as brick-and-mortar stores, online stores, mobile apps, and more. This eCommerce trend and approach allows businesses to reach more potential customers and provides a more seamless shopping experience. In the past, businesses have often treated each selling channel as a separate entity. However, this is changing as more and more businesses are adopting an omnichannel approach. This shift is driven by the increasing popularity of online shopping and the need for businesses to provide a more cohesive customer experience. As omnichannel selling becomes more common, it’s important for businesses to make sure they’re building eCommerce websites that can support it. This means having a platform that is integrated with all of your other selling channels and that provides a consistent experience for customers regardless of how they shop.  Environmental Sustainability Will Play a Big Role As we become more and more aware of the impact our consumption has on the environment, sustainability is becoming an important factor in purchasing decisions. Customers that follow new online shopping trends want to know if the products they’re buying have been ethically sourced and if the company they are buying from is taking steps to reduce its carbon footprint. In order to stay ahead of the competition, businesses need to make sure they’re considering environmental sustainability in all aspects of their operations. This includes everything from the sourcing of materials to the packaging and shipping of products. Customers are now more willing to pay extra for sustainable products, so there is a big opportunity for businesses that are able to meet this demand. How To Make the Best Use of ECommerce Trends ECommerce is constantly evolving, and it can be difficult to keep up. However, by staying informed and making sure your eCommerce platform is up to date, you can ensure that your business is able to stay ahead of the competition. To make the most of the latest eCommerce developments, consider the following: 1. Keep Up With the Latest Trends To stay on top of your game, you must be proactive and regularly seek out new information. There is a number of ways to do this, such as reading industry news, following relevant blogs and industry influencers, and attending eCommerce conferences. You can get to know what’s going on in the industry and find inspiration for your own business.  Read up on the research data and statistics that are available on eCommerce growth trends. This can help you understand the current landscape and make informed decisions about where to focus your efforts.  2. Take Advantage of Digital Tools There are a number of digital tools that can help you improve your eCommerce business. From marketing automation software to customer relationship management systems, there’s a variety of features that can make it easier to run your business and provide a better experience for your customers. Check the data and sales figures, and invest in analytical tools so you can understand where your customers are coming from and what they are looking for. 3. Learn From Your Competitors It’s important to keep an eye on your competitors to see what they are doing and how they are reacting to the latest eCommerce retail trends. You can learn a lot from observing their strategies and understanding their strengths and weaknesses. Should they fail, you can learn from their mistakes. If they succeed, you can try to replicate their success. Final Words As the global eCommerce ecosystem continues to grow and evolve, it's important to stay on top of the latest trends. Instead of leaning on traditional shopping methods, more and more consumers are turning to the internet to purchase items. Mobile phones play a big role here, as they provide a convenient way to shop on the go. What's more, consumers are getting more comfortable with new technologies such as AI, AR, chatbots, and voice search. These eCommerce trends in technology are changing the way we interact with eCommerce platforms and retailers. With all that said, we're confident that you now have a solid understanding of the current eCommerce landscape. Just remember to keep your eyes peeled for new trends so you can stay ahead of the curve.
By Danica Djokic · September 15,2022

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