What’s the Difference between an S Corp and a C Corp?

Corporate Creation

S Corp Creation

S Corps have a limited amount of shareholders, but this is not necessarily detrimental. An increased number of shareholders translates to more valuable opinions concerning the business, and also perhaps some new ideas every once in a while. This format also helps shareholders feel more included in the day-to-day business operations and provides them with a voice. It is also important to note that employees can also be shareholders.

C Corp Creation

In relation to S Corps, C Corps are simply easier to create if that is a factor in your decision. C Corps involve less paperwork and documentation, and when filing the certificate of incorporation, your company simply becomes a C Corporation. There is not much else you will need to do after that, and you can focus on getting started running your company on the right foot.

Tax Advantages

S Corp Tax

One of the stand-out aspects of S Corps is the tax structure. In terms of paying taxes, the owners of an S Corp must only declare their business gains and losses on their personal tax returns. Why is this so important? This means that many S Corps are able to deduct 20% (or less) of business profits on personal returns. Meaning an S Corporation can provide you the ability to include your business losses on a personal return, therefore creating a welcome “write-off.”

C Corp Tax

Now, a C Corp is usually able to deduct the entire amount of charitable donation as well as contributions if the donations do not surpass 10% of the business’ income. Owners are also able to deduct specific benefits, such as health insurance, in order to help employees.

So, while it is true that a C Corp’s double taxation policy is a drawback, the corporate tax rate for C Corps stands at a mere 21%.

When you file your taxes, remember this: it is believed that S Corporation tax filings are examined more closely than those of C Corporations. So, while C Corporations will subject you to taxes twice, the tax process for S Corporations is scrutinized in a more in-depth manner. In a worst-case scenario, your S Corporation status can be canceled if the Internal Revenue Service finds mistakes in your filing.

The most difficult aspect of forming and running a C Corporation is dealing with double taxation. Many business owners understandably balk at this, and it makes sense since the company is taxed for its own revenue and then taxed once more for the personal returns. You have earned money, but then you must pay taxes—therefore losing some of it—twice. For small businesses, this can be a financial hurdle that is difficult to make it over. Earnings are essential for all businesses, but especially smaller companies, and to lose out on money that has already been made twice can be disheartening.

Also, C Corporations do not let owners utilize write-offs on personal tax returns, which can sometimes help offset additional income. This is also something to consider when looking at the similarities and differences between corps, and what is right for your business.

Corporate Ownership

S Corp Ownership

Is ownership a key factor for you as you decide how to structure your business? If you are in the market for ownership that is limited, you will probably favor an S Corporation. Why? S Corps can only consist of 100 shareholders, and they need to be registered U.S. citizens.

There are also no differences among the categories of shareholders who are able to hold stock in the company. This means that if you decide on an S Corporation, you avoid dealing with any ranking order. If these are important concerns, you may want to start out with an S Corporation.

C Corp Ownership

Here is an often overlooked but key difference between the corps. In stark contrast to S Corporations, if you start up a C Corporation, you will not deal with any restrictions regarding ownership. Also, if your long-range business plan involves selling the company, or you are confident that you will search out funding with investors, then you will prefer a C Corporation over an S Corporation.

You are also able to have unlimited shareholders with a C Corporation. Why is this important? If you plan to sell stock to investors, this becomes easier through a C Corporation. Another important question that arises is: who can own C Corporations? The answer is that other corporations, other trusts, S Corporations, and even C Corporations can own other C Corporations.

Corporate Formation

S Corp Formation

Creating an S Corporation involves more work than forming a C Corporation. That is a fact. In addition to a certificate of incorporation, S Corps require added paperwork. While this may not be a major concern, some states also require other documentation and paperwork.

C Corp Formation

Many business owners assume that since creating a C Corporation more or less occurs by default, it is the correct move for their business. However, this is not true. The decision regarding the structure of your business is an important one and should be made carefully. While the growth opportunities offered by a C Corporation are attractive, you should ask yourself: is your company’s mission to obtain funding or be acquired by a larger business? Becoming a C Corporation can be beneficial for larger businesses or companies that desire to become larger, but if your company is smaller and you do not want it to become larger, a C Corp may not be the correct fit for you.

Disadvantages: S Corporation Ownership

S corporations undergo more intense scrutiny by the Internal Revenue Services, and this is essential to consider since it means that any transgressions can cause your business to lose its status as an S corporation.

Also, S Corporations must stay within a limit of 100 shareholders, and these shareholders need to be certified residents of the United States. While C Corporations allow multiple shares of stock for shareholders, S Corporations only allow shareholders one class or share of stock. Therefore, if you are hoping for the potential for high growth or are focused on doing business internationally, your business could suffer.

Also worth noting is that S Corporations cannot be owned by additional S Corporations, C Corporations, LLCs, or even trusts. So, if you are hoping that your company will be acquired in the future, these factors could limit those chances.

Disadvantages: Owning a C Corp

While C Corporations can make for great business structures, there are some additional details to consider. While C Corporations do not place limits on stock classes or restrict ownership, your company still must be managed correctly and kept current. This means issuing stocks to shareholders, holding board meetings, and holding shareholder meetings. You may also be required to pay fees to keep the ownership status of your C Corporation.

C Corp vs. S Corp: How Are They Similar?

1. Both offer protection of limited liability
2. The document filing process
3. Structurally
4. Corporate regulations are similar

Limited Liability: Breaking it Down

This category of protection implies that shareholders are not responsible for the company’s debts incurred through business or other financial obligations. S corporations and C Corporations both benefit from this type of protection. What does this mean? If something happens to your business, you are under no obligation to pay the debts of the company from your own personal pocket. It is important to note that this is much different if businesses are structured as sole proprietorships.

Distinct Business Entities

C Corps and S Corps can use distinct legal entities. What does this mean? When a business operates separately from the original company. Distinct entities have distinct liability from their ownership. This is what is meant by a “veil” or “shield” of corporate protection, which is a term you have probably heard before.

• Document Filing

When filing the certificate of incorporation for your business, the documents you file with the state will not change, regardless of your S or C Corp structure. S Corporations do require slightly more documentation, however.

• Structure

Both corporations are able to be set up by shareholders and owners. Also, the process of incorporation is the same for S corporations and C corporations. Also similar are the ways in which to issue stock and the process of adopting bylaws. Both structures employ the use of boards of company directors, and both file their financial reports annually.

• Corporate formalities

S Corps and C Corps possess largely similar structures, though their shareholders are owners. How does this work? In some instances, the business is run by a CEO and their chosen team, but the board of directors deals with policy decisions and other management concerns.