Are you confused between the S Corp and the C Corp? Don’t worry. You are not alone. Many business owners in the US right now are also not determined. Both corporations offer a range of benefits that can make them an attractive choice for certain businesses but with some major differences.
In that case, deciding on the proper structure could be challenging. But you are in the right place. We will help you by describing the details of C Corp vs. S Corp.
What Is a Corporation?
A corporation is a legal entity formed by individuals, stockholders, or shareholders that is separate from its owner. That means a corporation is liable for business finances and actions, not the shareholders.
Corporations are famous business structures among other businesses, like sole proprietorships or partnerships. It is because of corporations’ beneficial characteristics, such as limited liability to shareholders, business credibility, access to capital, etc. Some well-known corporations are;
- Apple Inc.
- Walmart Inc.
- Microsoft Corporation.
- The Coca-Cola Company.
- Amazon.com.
- Facebook.
- Google.
Plus, the corporation has different types with different advantages. We will describe it gradually below in our blog. Stay with us.
What Is S Corp (S Corporation)?
S Corp is a legal business structure that offers certain tax benefits with limited liability protection. It is the most convenient business structure for medium-sized businesses and small businesses.
Business owners (shareholders) who want to have the facilities of pass-through taxation with limited liability protection can form an S corp business structure. The condition is that S Corp. can have up to 100 shareholders.
What Is C Corp (C Corporation)?
C Corp is a famous legal business structure for giant companies because it can hold over 100 shareholders and provide strong shareholder liability protection and growth potential. C corp is taxed separately from its owners, which means it follows double taxation.
C Corp also provides several benefits, including unlimited stocks, higher capital gains, ownership flexibility, etc.
Why Is It Important to Select the Right Business Corporation for Your Business?
S corp and C corp are two different types of business structures with different types of benefits and drawbacks. Also, they have a different set of rules to follow to run a business. S corp and C corp have different purposes;
- C Corp is for bigger companies with unlimited shareholders and stocks.
- But S Corp is for small or medium businesses that want liability protection with pass-through taxation.
So, to run a small business with special benefits, you should form an S corporation. And if you want shareholders’ liability protection and hold unlimited stocks for your big company, you should form a corporation.
Selecting the right business structure for your business is a critical decision because the type of business structure you choose can significantly impact your success, legal standing, taxation, and overall operations. So, both corporations have different beneficial purposes, and you should choose one according to your business needs and goals.
What Are the Differences Between an S Corp and a C Corp?
S Corp. and C Corp. have distinguished differences, including their formation, taxation, ownership, stock practices, other benefits, and disadvantages. If you understand the differences well, you can find the right corporation structure for your business.
1. Eligibility-Wise Differences
| Aspects | S Corp Eligibility | C Corp Eligibility |
| Shareholders Requirements | Up to 100 shareholders. | No restriction on the shareholder’s numbers. |
| Origins | Shareholders can be domestic or international. | Shareholders must be US citizens. |
| Stocks | S Corps can have only one class of stock | It can have multiple classes of stock. |
| Raising Capital | Harder to raise capital. | Easier to raise capital. |
| Paperwork | Need to submit articles of incorporation and IRS form 2553. | Need to submit articles of incorporation. |
Note: In the US, in order to form an S Corp, you must first form a C Corp by submitting articles of incorporation documents, then change it to an S Corp by filing IRS Form 2553.
2. Ownership-Wise Differences
| Aspects | S Corp Ownership | C Corp Ownership |
| Shareholders Restriction | Internal Revenue Code places several restrictions on shareholders. | No restriction on shareholders. |
| Shareholders Type | Individuals and some estates, trusts, and tax-exempt org. | All eligible entities. |
| Ownership Flexibility | Provides more flexibility in allocating profits and losses based on their ownership percentages. | Offer greater flexibility in structuring ownership arrangements. |
| Management Structure | Simpler management structure. | Follow a hierarchy management structure. |
| Ownership Transfer | Easy to transfer ownership. | Comparatively hard to transfer ownership. |
3. Tax Implication-Wise Differences
| Aspects | S Corp Taxation | C Corp Taxation |
|
Taxation |
It has pass-through taxation. | C Corps is subject to double taxation. |
|
Pay Taxes |
Shareholders split up the company income and then pay taxes on their own personal income tax. | C corp pays corporate income tax on its income, and shareholders pay their income tax separately. |
|
IRS Form |
Files IRS Form 1120-S. |
Files IRS Form 1120. |
|
Filing |
Should file annually. |
Should file quarterly. |
|
Self-Employment Tax |
Shareholders can save on self-employment taxes. |
Shareholders do not pay self-employment tax but are subject to payroll taxes on wages. |
|
Accumulated Earnings Tax |
S Corps are not subject to the accumulated earnings tax. |
C Corps are subject to an accumulated earnings tax. |
4. Cost-Wise Differences
| Aspects | S Corp | C Corp |
|
Formation Costs |
Some states have lower filing fees for S Corps. |
Depending on the size of the company,. |
|
The average Formation Costs |
Is about $1,200. |
It is about $633. |
|
Ongoing company costs |
Lower costs. |
Need higher costs. |
|
Annual filing fees |
Requires lower annual filing fees. |
Requires higher annual filing fees. |
5. Formation-Wise Differences
How to Form an S Corp?
You need to follow a process to form an S Corp. in the US. Here is it:
- Choose a unique business name.
- Select directors among shareholders and appoint officers.
- Hire a registered agent.
- Submit articles of incorporation to the state.
- Hold a board meeting with the directors, shareholders, and others.
- Draft and adopt bylaws outlining the internal rules and procedures.
- Issue stocks [shareholders must be US citizens].
- Get EIN.
- File Form 2553 to elect S Corps status.
- Open a business bank account.
- Pay taxes on time.
- Get business, state, and other required licenses.
- Comply with ongoing state requirements and rules.
How to Form a C Corp?
Here are some general steps on how to form a C Corp.
- Choose a state.
- Register a unique business name.
- Appoint the CEO, board of directors, and officers.
- Hire a registered agent.
- File articles of incorporation.
- Hold a board meeting.
- Draft company Bylaws Bylaws outlining the internal rules and procedures.
- Obtain EIN.
- Open a business bank account.
- Issue stock. [Unlimited stocks].
- Register with the US Securities and Exchange Commission.
- Obtain state and business licenses.
- Pay taxes properly.
- Fulfill ongoing obligations such as filing annual reports, paying state franchise taxes, and adhering to corporate formalities.
6. Benefits of S Corp and C Corp
S Corp Advantages
S Corps offers a range of benefits, including:
- S Corps offers pass-through tax benefits.
- S corps offer tax benefits like shareholders can save on self-employment taxes.
- There is no accumulated earnings tax in the S Corps.
- S Corps offers several tax deductions, such as a 20% QBI deduction.
- In an S corporation, taxes should be filed annually, not quarterly.
- In a S Corp, ownership transfer is easy.
- It offers limited liability protection to shareholders and other employees.
- Shareholders can work as employees.
- It offers flexibility in distributing profits and losses.
- S Corps offers various fringe benefits, including health insurance, retirement plans, employee discounts, etc.
- S Corps enhances business credibility.
C Corp Advantages
Here are some key benefits associated with C Corps:
- C Corps attracts a diverse range of investors.
- C Corps can deduct net operating losses; if C Corps faces losses in one year, it can deduct them from future years’ profits.
- C Corps also offers various fringe benefits, including health insurance, retirement plans, life insurance, stock options, employee discounts, etc.
- It provides limited liability protection to shareholders.
- Fundraising in the C Corps is easy.
- C Corps can continue if shareholders die or leave the company.
- C Corps offers a lower tax rate.
- C Corps has flexibility in ownership.
- It has no restrictions on shareholders or classes of stocks.
7. Drawbacks of S Corp and C Corp
S Corp Disadvantages
- S Corps has eligibility restrictions for shareholders.
- S Corps has stock restrictions.
- Fundraising in S Corps is challenging.
- S corps are subject to closer IRS scrutiny.
C Corp Disadvantages
- The main disadvantage of C Corp. is double taxation.
- C Corp. is more costly to manage than other business structures.
- It is also complex to manage and maintain a C corporation.
- C Corps has a lack of flexibility in distributing profits.
What Are the Similarities Between the S Corps and the C Corps?
Although S Corp and C Corp are different business structures, they have similarities in some cases.
- S Corps and C Corps are separate legal entities from their shareholders.
- Both S Corps and C Corps offer limited liability protection to their shareholders.
- S Corps and C Corps follow specific corporate formalities.
- Ownership transfer in S Corps and C Corps is easier.
- Both Corps follow similar legal compliance.
What Should You Consider Before Choosing S Corp or C Corp for Your Business?
Choosing a suitable business structure between the S Corps and the C Corps is crucial for business owners. If you can choose the proper business structure for your company, it will grow to success faster. Here are some facts that you need to consider before choosing a structure:
- Business Needs and Requirements: Before choosing between S Corps and C Corps, check your business requirements, business size, shareholders’ eligibility, etc.
- Management Structure: Know both Corps management structures and choose the suitable one according to your company.
- Taxation: The taxation is different for S Corps and C Corps. So choose the one that is convenient for your business.
- Class of Stocks: We know that S Corps can have only one class of stocks. So, if you want unlimited stocks, choose C Corp.
- Liability Protection: Be sure about the liability protection your desired corporation offers, because limited liability protection is one of the most crucial benefits for shareholders.
- Cost: Cost is another crucial reason to consider before your business structure selection. If you have a limited budget, then go for S Corp.
How Do You Know Whether an S or C Corp Suits You? Need Help?
Your choice of business structure between S Corp and C Corp. greatly impacts many aspects of your business, including your business financing, business growth, and future goals. After reading our blog, compare the advantages and disadvantages of C Corp. vs. S Corp. It will help you come to a decision that best suits your business goals.
In order to make the right decision, you can take advice from Business Globalizer. They have experts who can analyze your business needs and requirements and suggest the most suitable structure.
FAQ
Q1: Can I change my Business Structure from C Corp to S Corp?
Answer: Yes, you can change your business structure from C corp to S corp by filing IRS Form 2553. However, changing business structures can be tricky, and you must also meet the eligibility criteria to become an S Corp.
Q2: Can I form an S corp from outside of the US?
Answer: No, you cannot form an S corp outside the US. If you want to have the benefits of an S corp, then you should form it in the US. S corp is specifically designed for US taxpayers to get tax benefits with liability protection.
Q3: Which is more costly S Corp or C Corp?
Answer: The formation cost, including the state filing fee, registered agent fee, annual filing fee, and other additional fees of both S Corp and C Corp, are the same. However, the ongoing maintenance cost of a C Corp is higher than that of an S Corp because a C Corp has more formal requirements and C Corp has more shareholders and employees.
Q4: Can you save money as an S Corp?
Answer: Yes, you can save money as an S corp because S corp has pass-through taxation. It can save businesses and individuals a significant amount of money on taxes.
Q5: Do I need to file the annual report for C Corp?
Answer: Yes, both S Corp and C Corp in the US need to file an annual report. However, the necessity of filing an annual report varies according to the state; some states require businesses to file an annual report, but some states do not.
Bottomline
Choosing the right business entity from C Corp vs. S Corp is a critical decision for any business owner. Because The right entity can provide unlimited benefits and business growth. But if you think that you formed an unfit business entity, then you could also change it by filing IRS Form 2553.
