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If you are involved in the business world, chances are you’ve heard the phrases ‘S corp’ and ‘C corp’.
The question is: what do these terms mean? What are the differences between the two?
To put it simply, an S corp is a corporation that is permitted to pass its taxable income, credits, deductions, and losses through shareholders.
A C corp, on the other hand, is a corporation that allows the owners to become legally separate from the business itself.
C corp is the standard corporation when it comes to IRS rules, whereas S corp has a specialized tax status.
Each of these types of corporations provides unique benefits and may be selected by business owners for a variety of reasons.
Today, I’ll be going over everything you need to know when it comes to S corp vs. C corp and how to choose between the two.
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Key Takeaways
All in all, whether you choose S corp or C corp depends entirely on your personal situation and your business structure.
There are a few essential factors to consider when it comes to each type of corporation.
Let’s briefly go over some important information you should be aware of when making a decision regarding S and C corps:
- S corps are able to avoid corporate income tax by passing their income, credits, deductions and losses through shareholders.
- C corps face double taxation, with the corporation first paying corporate income tax, then the shareholders paying personal income tax.
- Which structure works best for you depends on the current state of your business and your future plans.
- S corp is most popular with smaller businesses, while C corp is often the top pick for larger businesses.
S Corporation
S corporations are primarily known for the unique ‘pass-through’ tax structure.
This means that rather than pay corporate income tax, S corp companies may elect to pass their business income, credits, deductions, and losses through to shareholders.
C Corporation
A C corp is the most common tax status; large companies in the U.S. are generally C corps.
A C corp is subjected to double taxation. This means that the corporation first pays corporate income tax with a federal return, and then shareholders will be required to pay personal income tax for any gains made through the corporation.
What’s the difference between an S Corp and C Corp?
So, what are the key differences between an S corp and a C corp?
Let’s go ahead and take a look at some of the most significant ways that these two types of corporations differ:
| Criteria | S Corp | C Corp |
|---|---|---|
| Tax gains | Personal income tax | Double taxation |
| Tax losses | Can be written off on personal tax returns | Cannot be written off on personal tax returns |
| Tax filing | Annually | Quarterly |
| Permitted shareholders | Individuals and estates, trusts, organizations | All eligible entities |
| Shareholder origins | Domestic only | Domestic and international |
| Formation | Articles of Incorporation plus IRS Form 2553 | Articles of Incorporation (Default) |
| Stock classes | One class restriction | Multiple |
| IRS scrutiny | Above average for balance of salary vs. dividends | Average, all else equal |
| Equity financing | Difficult to raise capital | Easy to raise capital |
How to choose between a C Corp and an S Corp
Now you know the differences between C corps and S corps, but one question still remains: how do you choose between them?
The key is understanding your business structure and the unique requirements that come along with it.
Does double taxation align with your budget? Or would you prefer to face the extra IRS scrutiny?
It also pays to consider the future of your company. Do you intend to ever sell your business?
Would you open your doors to foreign investors?
These are all factors that will contribute to whether you choose C corp or S corp for your business.
Consulting with a business or financial advisor is another way to get some clarity regarding the best choice for your business.
S Corp vs. C Corp: Which option is best for you?
If you’ve made it to the end of this article – congratulations! You are now well informed about the ins and outs of S corp vs. C corp comparisons.
Now that you are armed with this knowledge, you’ll be able to make a choice that best suits your specific business needs.
Remember: there is no one-size-fits-all solution. Which option is best for you depends entirely on your situation and business structure.
That being said, it is generally recommended that you choose an S corp if you are a smaller business due to the potential for tax savings.
Similarly, choosing a C corp can be beneficial for larger businesses due to the opportunity to raise capital.
FAQs
Still have questions? Don’t worry – I’ve got answers. Let’s go ahead and take a look at some of the most frequently asked questions regarding S corps vs. C corps:
Is an S Corp better for a small business?
Yes. S corp is generally recommended to small businesses due to the amount of tax that can be saved.
That being said, each business model is different and will have different requirements.
Can an S Corp own 100% of a C Corp?
While an S corporation can become a shareholder in a C corporation, it can only own 80 percent or less of the outstanding stock in the C corporation.
However, this is not often recommended as it can lead to complicated tax situations.
Does an S Corp pay more taxes than a C Corp?
S corps are not subjected to double taxation in the same way that C corps are, meaning that you are likely to be taxed less.
This is why S corps are often the most common pick for smaller businesses.
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