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Difference between S Corp and C Corp
When starting a new business, potential business people often face the challenge of choosing between S Corp and C Corp corporation types. By understanding these two terms, you can save money and time. This article will help you understand the terms’ differences and their pros and cons. S corporation and C corporation are good choices while starting a new business.
What is Corporation?
A corporation is formed by establishing a document called “articles of incorporation” by registering the documents with the state. Both C corporation and S corporation have some similarities. Owners of both corporations are called shareholders, who elect directors to manage the business operations and hire managers to handle day-to-day operations. All the profits, called a divide, will be distributed to shareholders concerning how many shares they hold.
All corporations are required to adopt laws, issue stock and hold annual directors and stockholders meetings, document minutes of the meeting, file annual reports with the state government, the issue is written corporate resolutions for important decisions, and pay yearly fees. If the corporation fails to do these things, it will lead to personal liability protection and dissolution of the corporation.
Setting up a corporation leads to limited personal liability for the owners. It is generally set up under state law and becomes a separate entity legally from the owners. And when the business becomes a separate entity from the owners, all the debts will be cleared by corporation assets, not the owners. A shareholder will personally not be liable for the debts.
All corporations initially start as a C Corp and may be converted into S Corp later.
What is C Corp?
A C Corp is a default designation given to a newly started business or an incorporated company. Generally, this type of corporation gets taxed twice, and the shareholders also pay federal taxes through dividends.
What is S Corp?
C Corp can be converted into S Corp whenever the business is running well with higher revenue. If it gets converted to S Corp, the company must receive the consent of all the shareholders. S Corp comes with certain tax advantages.
Differences between S Corp and C Corp
The following table highlights the major differences between C Corp and S Corp −
| Factors | C Corp | S Corp |
|---|---|---|
| Formation | When starting a business, C Corp is the default model. | C Corp business can be later converted to S Corp business. |
| Taxation | Taxes need to be paid twice | Lots of taxes can be saved through S Corp |
| Ownership | No restrictions when it comes to ownership | Ownership is limited to 100 shareholders |
| Formation disadvantage | C Corp is a good move only for more prominent companies to grow bigger. | S Corp has more work and additional paperwork. |
| Taxation disadvantages | Double taxation policy leads to losing twice the money that has been earned. | S Corp taxes are heavily scrutinized, and S Corp status might get canceled if there is a mistake while paying a tax. |
| Scrutinization | Flexible and not very strict scrutinization compared to S Corp | S Corp companies will be scarcity scrutinized with a lot of rules and regulations |
| Business extension | Rigid ownership hinders the international business extension | The flexible request leads to a better business extension |
| Process | A business becomes C Corp by default when it forms a corporation. | A business needs to file form 2553 with the IRS. |
| Types of owners | Any entity can become the owner. | Owners must be individuals, trusts, nonprofits, or estates. |
| Class of stock | Can issue multiple classes of stock, such as Class A, Class B shares, preferred shares, and common shares. | Can issue only a single class of common stock |
| Nationality | C Corp can be based anywhere. | S Corp must be domestically based, and business owners must be US citizens. |
| Costs | Incorporating is more burdensome and expensive | Comparatively less expensive |
| Suitability | Large business | Small business |
| P and L allocation | Decided by members | Based on ownership |
| Payment of tax | The corporation itself pays tax | Owners pay tax |
Conclusion
Choosing between C Corp and S Corp can be confusing and tiring. Both have their advantages and disadvantages. One has to choose based on their business requirement. Generally, by default, Corporations are considered as C Corp unless it has been considered as S corp. Even though C Corp is taxed twice, they enjoy certain flexibility concerning no. of stocks, type of shareholders, stock options, and many more. Whereas a lot of taxation can be saved in S Corp, scrutiny and documentation by the government are rigorous.
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