C Corp Vs S Corp: What Are The Differences?

If you are wondering whether to get c corp vs s corp for your business, you are here at the exact right place. Whereas the c corp may be the perfect choice if you are planning to go public someday, s corp is a better option when it comes to the smaller companies.

Each of these corporation types has its own advantages and disadvantages. They also have major differences when it comes to the taxes.

In this article we shall take a look at the major differences between c corp vs s corp. This would help you decide which is the best option when it comes to incorporating it into your business.

So, without any delay, let us get started.

What Do You Mean By A Corporation?

A corporation is any legal entity that is considered to be separate and distinct from the owners. The law mentions that a corporation has a lot of similar rights to that of a person. Corporations may be able to borrow and loan money. They can sue and can be sued. They can enter into contracts. Corporations can own assets. They can hire employees and also pay taxes.

Additionally, one of the major elements of any corporation is limited liability. This means that the shareholders of the company would not directly be responsible for any of the debts of the business. This is indeed a very positive aspect of a corporation for every business owner out there.

What Do You Mean By A C Crop?

A C corporation is one of the most popular types of corporate structures. A business might become a C corp for legal, tax, or regulatory purposes. As far as the leadership structure is concerned, there is an elected board of directors which the company shareholders get to determine.

What Do You Mean By An S Corp?

An S corp is yet another type of corporate structure. It is a variant of a corporation which falls under the subchapter S of Chapter 1 of the IRS code. This is a legal entity that passes losses, deductions, credit, and income through shareholders for the purpose of federal tax. It also has relief from double taxation or limited liability. While the S corp offers specific protections that a C corp would not provide, there are more restrictions when it comes to an S corp.

Difference Between C Corp Vs S Corp

Now that you know what a c corp and s corp are, let us now get to the differentiation part of it. The basic difference between c corp vs s corp is the way in which the IRS taxes them. A C corp has its individual profits and losses stay within the business. They also file their own tax returns. A C corp also pays for its own tax returns.

When it comes to an S corp, the profits or losses flow through the shareholders. They may also claim it as their own tax return.

The other differences between c corp vs s corp may include ownership and formation. A C corp is considered to be the default structure of a corporation. They need to file the articles of incorporation in their particular state. On the other hand, an S corp requires to fill this documentation along with filling the Form 2553.

Let us now get to the actual differentiation part, where I will discuss the differences in more detail.

C Corp Vs S Corp: Formation

To form a C corp, you would first need to form a corporation. The formation should align with the laws of the state of formation. The process includes picking a name for the corporation and making the articles of incorporation. Then you need to register it with the secretary of state, prepare the corporate bylaws, select the directors, and hold the first meeting for the board of directors.

A C corp is the primary corporate structure. You may transition from a C corp to an S corp by filling out a special IRS form. The IRS Form 2553 is needed for this accomplishment. Businesses need to fill this out properly, file it, and have all the shareholders sign it.

C Corp Vs S Corp: Cost Of Formation

As per the reports from the market, the formation cost of an S corp is somewhere around $1,200. On the other hand, the cost to form a C corp may be approximately $633. When you get to think about it, the cost that you have to incur for either of these is pretty reasonable because you get the chance to own a business of your own.

C Corp Vs S Corp: Taxes

S corps do not have to pay any such income taxes. All the shareholders in the business split the total income and report it as their own income tax. This way, S corps easily avoid the trouble of double taxes.

On the other hand, the taxation process for C corps is completely different. A C corp has to pay an income tax totally on its income. They determine their income after subtracting the credits, losses, and deductions. Then, the C corp pays dividends to its shareholders. The shareholders then pay a personal income tax on the dividends. This is what we call double taxation.

C Corp Vs S Corp: Membership

Both US citizens and residents of the US can be shareholders of an S corp. There can be a maximum of 100 shareholders in an S corp. Even a teenager who has just turned 18 can be a part of an S corp. However, other entities like trusts and partnerships cannot hold stock in an S corporation.

On the other hand, you do not have to be a resident or a citizen of the United States to become a shareholder in a C corp. This makes the requirements for a membership in a C corp a lot easier in comparison to an S corp.

C Corp Vs S Corp: Class Of Stocks

Stocks are one of the most important components of any publicly traded business. An S corp has the permission of only one class of stock. On the other hand, a C corp may have more than one class of common stock.

C Corp Vs S Corp: Shareholder Origins

This is yet another important difference between C Corp vs S Corp. An S corp needs to be of a domestic origin and the company owners have to be either US citizens or US residents. On the other hand, a C corp does not have such restrictions and can be based anywhere.

The Bottom Line

Both C corp vs S corp are legal entities for a business. While they may have some similarities, there are differences as well.

Before you get to decide which one is the best for your business, it is better that you collaborate with legal and tax professionals. it is also better if you are considering your personal situation as well. You need to keep in mind your tax bracket, income, and your lifestyle.

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