{"id":494,"date":"2023-04-18T11:12:12","date_gmt":"2023-04-18T11:12:12","guid":{"rendered":"https:\/\/www.smallbizgenius.net\/?p=494"},"modified":"2023-06-19T07:57:25","modified_gmt":"2023-06-19T07:57:25","slug":"s-corp-vs-c-corp","status":"publish","type":"post","link":"https:\/\/www.smallbizgenius.net\/knowledge-base\/s-corp-vs-c-corp\/","title":{"rendered":"S-Corp vs. C-Corp: Definitions & Differences"},"content":{"rendered":"\n
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.<\/p>\n\n\n\n
Both C-corps and S-corps are legal business entities where the shareholders aren\u2019t 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\u2019s 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.<\/p>\n\n\n\n
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. <\/p>\n\n\n\n
Before we discuss the differences between S-corp and C-corp and analyze the pros and cons, it\u2019s 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.<\/p>\n\n\n\n
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\u2019s earnings and the owners\u2019 personal income.<\/p>\n\n\n\n
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<\/a>, 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. <\/p>\n\n\n\n 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<\/a>, the IRS taxes both individual and corporate dividends. That\u2019s why C-corp taxes are commonly referred to as a form of double taxation, as owners aren\u2019t permitted to write off corporate losses to offset earnings when filing personal income statements. <\/p>\n\n\n\n S-corp taxes don\u2019t 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. <\/p>\n\n\n\n We\u2019ve already touched on the key difference between a C-corp and S-corp business structure. But it\u2019s beneficial to delve deeper into how these tax structures impact different companies. <\/p>\n\n\n\n For starters, there are several important differences during the business formation process. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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<\/a>. This form has to have all the details about the fiscal tax year and the signatures of all the shareholders. <\/p>\n\n\n\n There are certain criteria companies have to meet to become S-corporations, including:<\/p>\n\n\n\n C-corporations file quarterly returns, while S-corporations file annual returns. <\/p>\n\n\n\n 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\u2019s also important to be mindful of the IRS eligibility requirements for shareholders, one of which doesn\u2019t permit nonresidents. <\/p>\n\n\n\n The table below offers a more comprehensive look at the differences between S-corporations and C-corporations:<\/p>\n\n\n\n Before deciding which business structure is most suitable for your company, it\u2019s important to weigh the pros and cons. Below are the main advantages and disadvantages of an S-corp tax status. <\/p>\n\n\n\n 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:<\/p>\n\n\n\n You may wish to consider sticking with the default C-corp tax structure if the following circumstances apply to your business:<\/p>\n\n\n\n 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. <\/p>\n\n\n\n When setting up a new business or exploring options for an existing one, it\u2019s 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:<\/p>\n\n\n\nHow Do C-Corporations Work?<\/h2>\n\n\n\n
How Do S-Corporations Work?<\/h2>\n\n\n\n
S-Corp vs. C-Corp: What\u2019s the Difference?<\/h2>\n\n\n\n
Formation<\/h3>\n\n\n\n
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Filing Tax Returns<\/h3>\n\n\n\n
Additional Considerations<\/h3>\n\n\n\n
<\/td> C-corp<\/strong><\/td> S-corp<\/strong><\/td><\/tr> Formation process<\/td> Default tax structure: formed through Articles of Incorporation<\/td> Articles of Incorporation + IRS Form 2553<\/td><\/tr> Taxes<\/td> Double taxation: personal income tax + corporate tax<\/td> Single taxation: personal income tax<\/td><\/tr> When are taxes filed?<\/td> Every quarter<\/td> Every year<\/td><\/tr> Number of shareholders <\/td> Unlimited<\/td> Limited to 100<\/td><\/tr> Types of shareholders<\/td> Anyone who is eligible<\/td> Individuals + eligible estates, trusts, and organizations that are tax-exempt<\/td><\/tr> Shareholder location<\/td> Domestic and international<\/td> Domestic only<\/td><\/tr> Stock class<\/td> Multiple<\/td> One class<\/td><\/tr> IRS scrutiny level<\/td> Standard<\/td> Above average<\/td><\/tr> Raising equity<\/td> Easier<\/td> More difficult<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n S-Corp Pros and Cons<\/h2>\n\n\n\n
S-corp advantages<\/strong>:<\/h3>\n\n\n\n
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S-corp disadvantages<\/strong>:<\/h3>\n\n\n\n
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C-Corp Pros and Cons<\/h2>\n\n\n\n
C-corp advantages<\/strong>:<\/h3>\n\n\n\n
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C-corp disadvantages<\/strong>:<\/h3>\n\n\n\n
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What Business Would Benefit From Being An S-Corporation?<\/h2>\n\n\n\n
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C-Corp vs. S-Corp Tax Advantages: When Is C-Corp the Best Option?<\/h2>\n\n\n\n
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Exploring Other Options<\/h2>\n\n\n\n
Other types of corporations include:<\/h3>\n\n\n\n
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Alternative business structures to explore:<\/h3>\n\n\n\n
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LLC vs. C-corp vs. S-corp<\/h2>\n\n\n\n
Formation<\/h3>\n\n\n\n