This video is part two of a corporate series. Check out our other video, What is the difference between a corporation and an LLC?
When embarking on your entrepreneurial journey, one of the critical decisions you’ll make is choosing the right legal structure for your business. Two popular options for structuring your business are the C-Corporation (C-Corp) and the S-Corporation (S-Corp). While each offers unique advantages, the decision between them hinges on several key factors. In this article, we’ll explore the distinctions between these two corporate entities to help you make an informed choice.
Forming an S-Corporation
Before diving into the differences, it’s important to understand how these corporations are formed. By default, every corporation begins as a C-Corporation. However, if you decide that an S-Corporation is a better fit for your business, you can make the switch by filing IRS Form 2553. This form provides essential ownership information to the IRS and secures the shareholders’ written consent for the S-Corp election. Keep in mind that converting from a C-Corp to an S-Corp, or vice versa, can present its own set of challenges, which we’ll discuss in a future article.
Differences between C-Corp & S-Corp
Now, let’s delve into the practical distinctions between these two corporate structures.
The primary and most significant difference between C-Corps and S-Corps is their tax treatment. C-Corps are subject to double taxation. This means that the corporation itself pays taxes on its income, and its owners and employees are additionally taxed on any income they receive from the company. While C-Corps can offer advantages, double taxation can be a concern for many business owners.
In contrast, S-Corps do not pay taxes at the corporate level. Instead, the company’s revenue is reported as personal income by its owners, who are then taxed individually at their respective tax rates. An additional benefit is that S-Corp owners can deduct business income on their personal tax returns, much like pass-through entities such as LLCs. However, it’s essential to note that S-Corps may face increased IRS scrutiny, emphasizing the importance of accurate filing and strict adherence to tax regulations to maintain S-Corp status.
Another critical distinction lies in the realm of business ownership:
- C-Corps can have an unlimited number of shareholders from anywhere globally.
- S-Corps, on the other hand, are subject to certain restrictions. They must have 100 or fewer shareholders, all of whom must be U.S. citizens. Moreover, S-Corps cannot be owned by other S-Corps, C-Corps, LLCs, or trusts. This limitation could potentially complicate the sale of the business in the future.
The choice between C-Corp and S-Corp status should align with your business goals, taxation preferences, and long-term vision. While C-Corps offer scalability and flexibility for future sale, S-Corps may be an attractive option for businesses aiming to remain small and closely held.
If you have further questions or need guidance on selecting the most suitable corporate structure for your business, consider reaching out to a qualified business attorney. They can provide invaluable insights and help you make an informed decision that aligns with your specific circumstances and objectives.