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S Corporations vs. C Corporations

You have several options to think about when considering how you would like your corporation to be administered. For example, many businesses will choose an LLC, whereas others will explore an S Corporation or a C Corporation.


While they only differ by one letter, they do not work in the same way. Here's how to differentiate and understand the benefits and drawbacks of various C and S corporation features.


S Corporations vs C Corporations: Differences


The primary distinction between C and S companies is taxation. C corporations pay taxes on their earnings, and you pay taxes on any revenues you obtain as a stakeholder or employee. An S company does not have to pay taxes. Instead, you and your co-owners record the revenues as earned income.


Regarding S Corporations and C Corporations, the three key distinctions are establishment, taxes, and possession.


  • Establishment

C Corporations are the most common kind of corporation preferred by many businesses. Therefore, when you file articles of incorporation in your state, you are classified as a C Corp. Form 2553 must be filed if you wish to incorporate an S Corporation. 


There may be additional forms to fill out to maintain your status as an S Corp.

  • Taxes

C Corporations are taxed twice by the business and once by the members through dividends. S Corporations are vulnerable to pass-through taxation. This is how stockholders record business revenue and losses on their personal tax returns. 


As a result, the only taxes they must pay are those shown on their personal tax return. There is no corporate taxation.

  • Ownership

There are no limits on the ownership for C corporations. Anyone may become an owner, and there can be as many as you want. However, S Corporations are restricted to 100 stakeholders, all of whom must be US residents.


S Corporation and C Corporation: Benefits


  • Establishment Benefits

    • S Corporation

A small number of shareholders isn't always a negative thing, specifically if you appreciate the stakeholders' perspectives of your business. 


It involves them more in day-to-day operations and provides them with a voice. Employees can become stakeholders.


    • C Corporation

C Corporations are less difficult to establish than S Corporations. There is minimal paperwork, and when you submit your articles of incorporation, you are granted the default status of a C Corp. 


  • Taxation Benefits

    • S Corporation

One of the most significant advantages of S Corporations is the elimination of taxes. Instead, owners must only disclose business revenue and losses on their personal income tax filings. 


Most S Corps typically claim up to 20% of their revenue generated on their individual tax returns. Therefore, if you have an S Corp, you may be able to deduct your company expenses on your personal tax return.


    • C Corporation 

If your charitable contributions and gifts do not exceed 10% of your company's revenue, you can deduct 100% of them on your business tax return. You may also assist your employees by eliminating certain perks, such as health insurance. 


While double taxation is a disadvantage, the 2017 Tax Cuts and Jobs Act lowered C Corp taxes by 21%.


  • Ownership Benefits 


    • S Corporation

An S Corp is a better option if you want to have restricted ownership. These structures are limited to 100 shareholders, all of whom must be US residents. 


There are no restrictions on the categories of shareholders who can own stock. If you prefer to prevent a priority ranking, an S Corp is the way to go.


    • C Corporation

C Corporations have no ownership limits. C Corp is ideal if you want to liquidate your firm or seek investment from interested investors. There is no limit to the number of stakeholders for businesses incorporated as Corporations. 

So, if you want to offer shares to potential investors, a C Corp is a far better option. Other C Corps, S Corps, businesses, and foundations may own these corporations.


S Corporation and C Corporation: Drawbacks


  • Establishment Drawbacks 


    • S Corporation

Forming an S Corp requires more effort than establishing a C Corp. To become an S Corp, you must complete additional documentation, including Form 2553, when you execute your articles of incorporation. In addition, when incorporating as an S Corporation, certain states have distinct criteria.


    • C Corporation

Even while creating a C Corp is automatic when you submit your articles of incorporation, it is not always the best option for every business. You may have limitless potential for expansion, but not every firm wants to be purchased or funded. Nevertheless, it's an intelligent step for big corporations or those aspiring to be larger ones. 


If you don't have (or don't want) a large corporation, you may not need to register as a C Corporation. 


  • Taxation Drawbacks


    • S Corporation

S Corporation tax statements are more investigated intensively by the IRS than C Corporation tax returns. Therefore, even though you are not liable to tax, S Corporation taxes are more closely reviewed. As a result, your S Corp status may be terminated if the IRS detects an error.


    • C Corporation

The most significant disadvantage for C Corporations is double taxes. First, the revenue of your business is taxed, and then you are taxed again for personal returns. It suggests you're operating at a loss twice as much as you're making.

This is significantly damaging for smaller firms that lack the flexibility to be taxed twice. When you pay corporation taxes, it deducts from your income.


C corporations do not enable owners to deduct business expenses on their income tax filings. This is frequently done to counterbalance other sources of income.


  • Ownership Drawbacks

    • S Corporation

Because S Corps are reviewed more closely by the IRS, breaching any restrictions might result in your S Corporation status loss. For example, you must adhere to the 100-shareholder limit, and all stockholders must be US citizens. 


Furthermore, S Corps can only have one type of stock, but C Corps can have many kinds of stock. This might be detrimental to your business if you anticipate rapid expansion or conduct worldwide operations.


S Corps are not permitted to be owned by other S Corps, C Corps, LLCs, or trusts. This might harm the acquisition of your business if you intend to be purchased at some point.

    • C Corporation

C Corporations have no limitations on ownership or stock classes. However, you will still need to maintain your business up to date by properly managing it. 


If required, you may need to issue shares to shareholders and convene shareholder and board of directors meetings. In addition, if and when appropriate, you may be required to pay fees to retain your C Corp ownership status.


What are the Similarities Between S Corporations and C Corporations?

The similarities between S corporations and C corporations are as follows:


  • Limited Liability Coverage 

S Corps and C Corps both have little liability coverage.


  • Independent Legal entities

Separate legal entities are available with both C Corporations and S Corporations.


  • Documentation

Whenever you submit your articles of incorporation with your jurisdiction, the documentation would be the same whether you register as a C Corporation or an S Corporation.


  • Structure

Both forms of organizations permit their own investors and ownership structure. 


  • Formalities in Business

Although stakeholders run the corporation, both have identical corporate structures.


You can examine the differences between C-corporations and S-corporations to select the best option for your business. In addition, you can visit IncDecentral.com to get assistance to incorporate your business and learn more about C and S corporations.


Notice: The details provided within it do not constitute legal advice. The knowledge of this article is for general reference purposes only. Your access to or reliance upon this piece of information does not create any relationship involving an attorney or client. You should always head out and consult an attorney for specific legal advice regarding your situation.