C Corporation vs S Corporation (S Corp vs C Corp)

C Corporation vs S Corporation?

Both C corporations and S corporations are legal entities that exist separately from their owners. They are sometimes called for-profit or business corporations. A C corporation is simply a standard business corporation.  The reason it’s named “C Corporation” is because it is taxed under subsection “C” of the IRS code.  An S corporation is a C corporation that has made an optimal election to be taxed under subsection “S” of the IRS Code. This article will help you better understand C Corporation vs S Corporation (S Corp vs C Corp).  Read on to learn more about the advantages and disadvantages of both types of corporations.

Defining C Corporations

Defining C Corporation Advantages and DisadvantagesThe C corporation is the most common business structure. A corporation is a separate legal entity owned by its shareholders. As a result, it protects its owners from personal liability and corporate debts and obligations.  A corporation’s directors, officers and shareholders must witness particular formalities in a corporation’s administration and operation.  For example, decisions regarding a corporation’s management must often be made by formal vote and must be recorded in the corporate minutes.  Meetings of directors and its shareholders must be properly noticed and must meet quorum requirements.  Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.

Taxation is a significant consideration when choosing a business structure.  Unlike a partnership that allows “pass-through” taxation, a C corporation is taxed as a separate legal entity.  If the corporation distributes profits to the shareholders in the form of dividends, shareholders pay income tax on those distributions; thus, commentators criticize C corporations as imposing “double taxation.”

As with any business entity that offers liability protection to its owners, a corporation must be created at the state level. A corporation begins its life by filing articles of incorporation (sometimes called a certificate of incorporation) in the appropriate state and paying the necessary filing fee.

Advantages of C corporations

  • Typically shareholders are not personally responsible for the debts and liabilities of the business.
  • C corporations can have an unlimited number of shareholders.
  • Ownership is easily transferable through the sale of stock.
  • Corporations have unlimited life extending beyond the illness or death of the owners.
  • Certain business expenses may be tax-deductible.
  • Additional capital can be raised by selling shares of the corporation’s stock.

Disadvantages of C corporations

  • C corporations may incur double taxation.
  • Corporations are more expensive to form than sole proprietorships and partnerships.
  • C Corporations face ongoing state-imposed filing requirements and fees.
  • All C Corporations face ongoing corporate formalities, such as holding and properly documenting annual meetings of directors and shareholders.

Defining S Corporations

An S corporation is standard corporation after filling for a S corporation status with the Internal Revenue Services.  The S corporation’s tax election adopts pass-through taxation – thereby sidestepping the double taxation burden borne by C corporations.  Much like a partnership an S corporation files an informational tax return, but the entity pays no tax.  The shareholders report their share of the S Corporation’s profit or loss on their individual tax returns.

Advantages of S corporations

  • S corporations are not taxed at the entity level – profits pass through to owners.
  • Shareholders are typically not personally responsible for the debts and liabilities of business.
  • S corporations have unlimited life extending beyond the illness or death of owners.
  • Certain business expenses may be tax-deductible.
  • Additional capital can be raised by selling shares of the corporation’s stock.

Disadvantages of S corporationsC Corporation vs S Corporation Advantages and Disadvantages

  • The IRS imposes restrictions on S corporation shareholders.  This requires there to be less than 100 shareholders.  The shareholders must be individuals, estates or certain qualified trusts; and cannot be non-resident aliens.
  • S corporations can have only one class of stock (disregarding voting rights).
  • All shareholders must agreement in writing to the S corporation election.
  • S corporations are more expensive to form than sole proprietorships and general partnerships.  They also face continuous, state-imposed filing requirements and fees.
  • A few states do require a state-level filing for the entity’s S corporation status to be recognized by the state.
  • S corporations deal with continuous corporate formalities, such as holding and properly documenting annual meetings of shareholders and directors.

You should now have a better understand of a C corporation vs S corporation.  When you compare a C corporation vs S corporation there are lots of things to consider.  No matter which direction you take when it comes to incorporating your business in you should fully understand all of the legal entities and decide, which one will work best for your business.

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