C-Corporation or S-Corporation: Which entity is right for your business?

This video is part two of a corporate series. Check out our other video, What is the difference between a corporation and an LLC?

Transcript

Hello, my name is Drew Pinta, and I’m an attorney with the Business Law Group at Carlile Patchen & Murphy.

In this video, we will cover the distinctions between two types of corporation you can form: the C-Corporation, or “C-Corp”, and the S-Corporation, or “S-Corp”. If you have determined that a corporation is the best entity type under which to form your business, your next decision will be whether it will be a C-Corp or an S-Corp. Like the choice between LLC and Corporation, each offers some advantages over the other, and your choice will hinge on a few different factors.

Here is a quick disclaimer before we begin.

This video is for informational purposes only and should not be considered legal advice. Before making decisions for your business it is always best to have a candid conversation with your attorney about your specific circumstances.

Forming an S-Corporation

The C-Corporation is the “default” corporation, meaning that upon incorporating, every corporation starts as a C-Corp. A C-Corp can become an S-Corp by filing form 2553 with the IRS. This form 2553 provides necessary ownership information to the IRS and provides the shareholders’ written consent to making the S-Corp election. Conversion from C-Corp to S-Corp status, and vice versa, may present issues of its own. Those issues will be covered in a future video.

Differences between C-Corp & S-Corp

So, we’ve talked about how to form an S-Corp. But how do the two corporation types differ in practice?

Taxes

Let’s talk about taxes. This is the primary difference between the two. C Corps pay tax on their income, and its owners and employees are taxed additionally on any income they make through the company. This is referred to as double taxation, and it may be a situation that you wish to avoid as a business owner.

In contrast to C-Corps being taxed directly, S-Corps do not themselves pay tax. Instead, its owners report company revenue as personal income – and those owners are therefore taxed at the individual level at their individual rates, rather than at the corporate rate. An added benefit is that S-corp owners can also make deductions of business income on their personal tax returns. If you are familiar with LLCs, and how they are taxed as pass-through entities – the same rules apply here. However, note that S-corps can face additional IRS scrutiny, so accuracy in filing and close following of the rules is very important to keep S-corp status.

Ownership

Finally, let’s talk about business ownership. C-Corps can have any number of shareholders from anywhere in the world, while S-corps must have 100 or fewer shareholders, all of whom must be U.S. citizens. Additionally, S-Corps cannot be owned by other S-Corps, C-Corps, LLCs, or trusts, which could make the business difficult to sell in the future.

Conclusion

While C-Corp status allows for large-scale growth, and the flexibility to sell the company in the future, the S-Corp shareholder limitations may be beneficial for businesses who want to stay small and closely held.

If you have any further questions about C-Corp and S-Corporation’s please contact a Carlile Patchen & Murphy business attorney, we would be happy to help.