S Corp is a standard business. They opt to pass business interest, loss, debits, and credits through their owners for allied tax pretext. S corporations do not pay tax on the business income twice. This is a huge benefit as they avoid double taxation.
S Corp vs C Corp
The main difference between S Corp and C Corp is that S Corp doesn’t pay tax. C Corporation pays tax on its income.
S corporation is not a business entity type but a tax designation. You need to apply to IRS to become one of the S corporations. C Corp is a valid system for an organization. Shareholders or owners are taxed differently from the entity.
The shareholders of a C-Corp own the business but they don’t make most of the decisions. The policy issues and management are left to the shareholder-elected board of directors.
Comparison Table Between S Corp and C Corp (in Tabular Form)
| Parameter of Comparison | S corporation | C corporation |
|---|---|---|
| Ideal for | Ideal for mature businesses looking to share profits to their owners | Perfect for new and growing businesses. Those that intents to reinvest gains back into the firm |
| Restrictions on Shareholders | They have no more than 100 shareholders. They have an exclusive set of assets. They must be a local partnership. | C corporations have no restrictions |
| How they are seen by outside investors | Because of the pass-through entity, they are seen as unfavorable. | They are seen as favorable because they have few restrictions. |
| Required IRS tax forms | S Corp requires Form 1120S- U.S. Income Tax Return. Form 1120W-W- Estimated Tax for Corporations. Form 941 – Employer’s Quarterly Federal Tax Return | Form 1120S – U.S. Corporation Income Tax Return Form 1120-W- Estimated Tax for Corporations Form 941- Employer’s Quarterly Federal Tax Return |
| How they are taxed | S Corporations are taxed once- their profits go to the owners | C Corporations are taxed twice. One taxation at the corporate level and another at a personal level. |
| How each is created/formed | S Corp comprises fundamental. They then submit a request to the IRS by complying with Form 2553 | They file a license for constituting a company in your state. |
What is S Corp?
S Corp is a legal partnership. It makes lawful vote to be imposed a toll on under Subchapter S of Chapter 1 of the Internal Revenue Code.
S corporations have limited liability for shareholders just like C-Corps. These businesses can take advantage of pass-through taxation.
The profits and losses of S corporations are reported on the owners’ tax returns. There is no corporate income tax levied on S Corps.
The compliance obligation and documentation are similar to C Corps. S Corp needs to file its articles of incorporation and issue stock. They also need to hold shareholder and director meetings and more. But they have limited ownership and limited stock flexibility.
What is C Corp?
C Corp is any corporation taxed differently from the owners. The taxation of gains is done at the corporate level. Profit distributions to shareholders in the form of dividends are also taxed.
C-Corporation is owned by shareholders but they don’t make most of the decisions. The official daily duties of the business lie in the hands of the officers of the C-corporation like the CEO.
To structure your business as a C corporation, you need to register articles of incorporation with the state government.
C Corp can have a lot of shareholders. They can also easily raise money as they can issue much class of stock to an unlimited number of shareholders. But they pay more in taxation due to double taxation.
Main Differences Between S Corp and C Corp
Formation
To form your company as an S Corp, you need to fill IRS FORM 2553. After the registration, you become an S-Corp for federal tax purposes. To be treated as S Corp for state tax, you need to file extra papers at the state level.
The C Corp is the non-remittance type of corporation. It becomes an ordinary C Corp when you submit reports of constituting a company with the secretary of state.
Ownership
S Corp is limited to up to a hundred shareholders. Shareholders must be resident aliens. Besides, there is no variation between shareholders. This makes it hard to raise funds.
C Corp has an unlimited number of shareholders and several classes of shareholders. This provides more flexibility to develop the business.
Taxation
S corporation has a unique tax classification. Shareholders of S Corp report their share of the business profit and losses on the personal tax return. They pay tax once at the personal income tax rate. As a shareholder of S Corp, your business income tax is deducted at a personal level. This is when you file Form 1120S.
C Corp is double taxed. The first taxation takes place at the corporate level when shareholders file corporate income return tax Form 1120. The second taxation is done on the owner’s income tax returns. But this is when the corporate profit is distributed as a dividend to shareholders.
Conclusion
You should consider C Corporation if you are new and want to reinvest gains back into the business. If you intend to generate money from investors who are likely to invest in a pass-through entity, go for C Corp.
If you are a domestic corporation and you don’t plan on having more than a hundred shareholders, consider S corporation.
Consider investing in S Corp if you want to take the interest out of the company. Also, if you plan to pay you a fair salary as per the IRS.
The way you structure your business will be a determining point. It will have an impact on the future of the business. Consult an accountant or lawyer if you are unsure about choosing your business entity.
References
- https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations