The Difference Between A C Corporation & S Corporation

November 15, 2017

When starting a business, many business owners will have to evaluate whether to become a C corporation or an S corporation. These are two of the most common ways to incorporate, and both have their own benefits depending on the business owner’s goals. Let’s take a look at the similarities and differences.

The Basics

A C corporation is the standard formation and the most common type of corporation in the U.S. whereas an S Corporation has a special tax treatment that is sought by filing Form 2553 with the IRS. An S corporation election can be filed after the corporation is formed.

Both formations are similar in that they are separate legal entities, structured in the same manner (shareholders, directors, officers), and offer limited liability protections. Additionally, formation documents for both must be filed with the state, and both are expected to follow the same formalities regarding bylaws, stocks, annual reports, annual fees, and shareholder/director meetings.

Taxation

Taxation is considered one of the biggest differences when evaluating a C Corp. and S Corp.
 
  • C Corporation.  C Corps are separate taxable entities. They file a corporate tax return (1120) and pay taxes at the corporate level. C Corps are taxed at the corporate level and then again at the personal income tax level; this is why they are known for having “Double Taxation”.
     
  • S Corporation. S Corps are pass-through tax entities. They file an informational federal return (Form 1120S). Income tax is not paid at the corporate level. The profits and losses of the business are “passed-through” the company and reported on the owners’ personal tax returns and paid at the individual level.

Ownership

C corporations have no restrictions on ownership, allowing more flexibility for growth, expansion, or a sale of the company. S corporations, however, have a handful of ownership restrictions. According the IRS, S Corps may not:
 
  • Have more than 100 shareholders
  • Have shareholders who are not U.S. citizens or residents
  • Issue more than one class of stock
  • Be owned by a C Corporation, other S Corporations, LLCs, partnerships, or various trusts.
     
Choosing which corporation is best for you can be a complex and time consuming process. If you’re looking to start a business, the lawyers at Isom Stanko & Senter will gladly help you through the process today!