The Differences Between S Corp and C Corp, Read Here!

When starting a business in the United States, you must know two popular corporate entities. There are the S corps and the C corps. Even though they are quite similar there are some differences between the S corps and the C corps.

The differences between the S corps and the C corps are limited liability protection and formal incorporation processes, they differ in key aspects, including taxation, ownership restrictions, stock practices, and employee benefits.

Understanding these differences is essential for business owners and entrepreneurs to make informed decisions that align with their business goals, tax planning, and growth strategies.

In this guide, we'll explore the main differences between S corp and C corp to help you determine which structure best suits your business needs.

Whether you're considering a startup, a small business, or a larger corporation, choosing a business type is a crucial decision as it can have significant financial and operational implications. 

Understanding the differences between S corp and C corp can help you to decide which business type matches your business needs and goals.

Without any further ado, let’s discuss what is S corp and C corp in the full explanation down below!

What Is a S Corporation?

An S corporation (S corp) is a business entity with a special tax structure that passes through income, losses, deductions, and credits to the shareholders' tax returns.

This structure is different from a C corporation, which is taxed at both the corporate and individual levels (double taxation).

Tax Benefits:

• S corporations avoid double taxation as they are not taxed at the corporate level.
• Shareholders report corporate income, deductions, credits, and losses on their tax returns, potentially reducing personal income tax liability.

Requirements and Qualifications:

• To become an S corp, a business must file Form 2553 with the Internal Revenue Service (IRS) after incorporating it at the state level.
• S corporations are limited to a maximum of 100 shareholders.
• Shareholders must be US citizens or residents.

Advantages of S Corps:

• Pass-through taxation can be beneficial for small businesses, offering tax savings and simplifying tax reporting.
• Shareholders have limited liability protection, similar to other corporate structures.

Limitations and Restrictions:

• S corps have ownership limitations: a limited number of shareholders, shareholder eligibility requirements, and certain restrictions on transferring shares.
• This structure may not be suitable for businesses that need to raise significant capital or go public, due to shareholder limitations.

Use Cases for S Corps:

• Ideal for small businesses that meet the criteria and want to avoid double taxation.
• Suitable for business owners seeking corporate liability protection without corporate-level taxes.

What Is a C Corporation?

A C corporation (C corp) is a type of business structure that is treated as a separate legal entity from its shareholders. It is characterized by its potential for unlimited growth, its flexibility in ownership structure, and is subject to double taxation.

Formation Requirements:

To establish a C corporation, a business must complete a series of legal steps, including:

• Registering under a unique business name.
• Appointing corporate officers.
• Filing articles of incorporation.
• Drafting corporate bylaws.
• Issuing stock certificates.
• Obtaining relevant local business licenses.
• Submitting IRS Form SS-4 to obtain an Employer Identification Number (EIN).

Tax Structure:

C corporations are subject to double taxation. Corporate profits are taxed at the corporate level, and shareholders are taxed on dividends at the individual level. This is a key difference from S corporations, which avoid double taxation through pass-through taxation.

Ownership Flexibility:

• C corporations can issue multiple classes of stock, offering greater flexibility for equity financing and investor arrangements.
• There is no limit to the number of shareholders, making the C corporation suitable for large-scale growth and public offerings.

Advantages of C Corps:

• C corporations can accommodate unlimited shareholders, making them ideal for businesses aiming for significant growth or a public offering.
• The ability to issue multiple classes of shares provides flexibility in structuring ownership and raising capital.

Disadvantages of C Corps:

• Double taxation can increase the overall tax burden for shareholders.
• Compliance with complex corporate formalities is required, adding to administrative costs.

Use Cases for C Corporations:

• Suitable for businesses that anticipate significant growth, require substantial capital, or plan to go public.
• Ideal for companies looking to offer multiple classes of stock or attract institutional investors.

What Is The Difference Between S Corp and C Corp?

S corporations (S corporations) and C corporations (C corporations) are two common business structures with clear differences in terms of formation, taxation, ownership, stock practices, and employee benefits. 

The following is a summary of the differences between S corp and C corp to help business owners choose the most appropriate structure for their company:

1. Formation

C corporations: It automatically starts as a C corporation upon formation. To form it, the business must register under a unique name, appoint corporate officers, file articles of incorporation, draft bylaws, issue stock certificates, obtain a local business license, and submit IRS Form SS-4 to obtain an EIN.

S Corporations: Starts as a C corporation but must file IRS Form 2553 to change status to an S corporation. There may also be state forms that must be filed for state tax purposes. Such forms must be filed by March 15 of the calendar year for calendar year corporations.

2. Taxation

C Corporations: Subject to double taxation. Corporate profits are taxed at the corporate level, and shareholders pay taxes on dividends at the individual level. This can increase the overall tax burden.

S Corporations: Uses a pass-through taxation structure. Income, losses, deductions, and credits are passed through to shareholders, who report them on their tax returns. This avoids taxes at the corporate level and can reduce tax liability.

3. Ownership Restrictions

C Corporations: There are no ownership restrictions. They can have unlimited shareholders, and shares can be owned by various entities, including other corporations, LLCs, and partnerships.

S Corporations: Have strict ownership limits. They can have up to 100 shareholders, all of whom must be US citizens or residents. Additionally, other corporations, LLCs, partnerships, and certain trusts cannot own shares in an S corporation.

4. Share Practices

C Corporations: Can issue multiple classes of stock, allowing for a variety of rights, control, and voting options. This flexibility is beneficial for businesses looking to raise capital and attract investors.

S Corporations: Restricted to a single class of stock, although voting rights may vary. This limits their ability to raise capital or attract diverse investors, potentially affecting business growth.

5. Employee Benefits

C Corporations: Can offer more extensive employee benefits, such as health insurance, retirement plans, and tax-free fringe benefits. These benefits are fully deductible for the company and non-taxable for shareholders.

S Corporations: Faces restrictions on benefits. Benefits offered to shareholders who own more than 2% of the company's stock are taxable, and S corporations cannot deduct the cost of certain benefits, such as health insurance premiums.

Conclusion

Understanding the differences between S corps and C corps is essential for making informed decisions about your business structure. Both structures have unique advantages and disadvantages, and your choice will depend on your business's size, goals, and growth strategy.

Regardless of which corporate structure you choose, having a website allows you to connect with customers, showcase your products or services, and build brand credibility. 

A professional website can also improve your search engine visibility, driving more traffic and generating more leads. This is where SEO Services by cmlabs come in.

With strategic SEOlutions, cmlabs can ensure your website is fully optimized to rank high on search engine results pages (SERPs), making it discoverable for your potential customers. 

Our comprehensive SEO Services, from keyword optimization to content creation and technical SEO, can give your business a competitive edge in the SERPs.

Contact cmlabs marketing team now to discover how our SEO Services can boost your website's performance and help your business dominate in the search engine rankings.