Difference between S Corp and C Corp

Table of Contents

According to IRS regulations, the C Corporation is the normal (or default) corporation. The S corporation is a business that has chosen a particular tax status with the IRS and hence benefits from certain tax benefits.

S corp and C Corp

Here are some characteristics that both C Corp and S Corp have in common:

Limited liability protection: Because corporations have limited liability protection, shareholders (owners) are usually not personally liable for the debts and liabilities of the company. This is true whether the company is taxed as a C or S corporation.

Similarities between crop and C crop

Corporations (C corps and S corporations) are separate legal entities formed as a result of a state filing.

Documentation to be filed with the state: Formation documents must be filed with the state. Whether you choose to be taxed as an S company or a C corporation, these documents, known as Articles of Incorporation or Certificates of Incorporation, are the same.
Shareholders, directors, and officials are all present in S and C corporations. The corporation’s owners are the shareholders, yet the business is owned by the corporation.
Corporate formalities: When it comes to compliance requirements, state corporation statutes make no distinction between C corporations and S corporations. Corporate formalities and requirements, such as adopting bylaws, issuing stock, having shareholder and director meetings, maintaining a registered agent and registered office, filing annual reports, and paying annual fees, are all required of all corporations.

S corporation vs. C Corporation

S corporation vs. C Corporation: the differences

S corporation meaning

Taxation

When deciding between S corporations and C corporations, small business owners must consider how they want their corporation to be classified for federal income tax purposes.

C corporations

C corporations are taxed separately. They have to file a business tax return (Form 1120) and pay corporation taxes. If corporate income is transferred to firm owners as dividends, which are considered personal taxable income, they may face double taxation.

S corporations

S corporations are taxed as pass-through organizations. They file a federal return for information (Form the 1120S), but there is no income tax paid at the company level. Instead, the business’s revenues and losses are “passed-through” to the owners and recorded on their tax returns. The proprietors pay any taxes that are payable on an individual basis.

Corporate ownership

As previously stated, State Corporation statutes do not distinguish between S and C corporations. However, for the organization to qualify as an S corporation, the Internal Revenue Code has many restrictions on who can be shareholders.

Shareholder restrictions

S corporations are limited to 100 shareholders, all of whom must be US citizens or residents. The ownership of C corporations is unrestricted.

Difference between s Corp. and c Corp

S corp vs. c corp tax advantages

S Corporation Advantages

A single layer of taxation: The fundamental advantage of an S corporation over a C corporation is that an S corporation does not have to pay corporate income tax.
20% qualified business income deduction: The Tax Cuts and Jobs Act of 2017 allowed shareholders of S corporations to deduct up to 20% of their net “qualified business income.”
Pass-through of losses: An S corporation’s losses are passed on to its shareholders, who can utilize them to offset revenue (subject to restrictions of the tax law).

S Corporation Disadvantages

A limited number of shareholders: An S corporation cannot have more than 100 shareholders, which prevents it from going public and restricts its capacity to attract funds from additional investors.
Other shareholder restrictions: Individuals who are citizens or residents of the United States are required to be shareholders (with a few exceptions).
Preferred stock not allowed: A corporation that wants to be classified as an S corporation can’t have distinct stock classes. Some investors desire special treatment when it comes to payouts or other benefits.

C corporation advantages

Unlimited number of shareholders: A corporation taxable under Subchapter C can have an unlimited number of stockholders.
No restrictions on ownership: Shares can be owned by anybody, including corporations and non-residents of the United States.
No restrictions on classes: A-C corp. can issue more than one class of stock, including stock with preferences to dividends and distributions.

C corporation disadvantages

Double taxation: The fundamental disadvantage of a C corporation is that it pays tax on its earnings while its shareholders pay tax on dividends, resulting in double taxation of the firm’s earnings.