When starting a business, one of the first items on your list will be to select the entity under which the company will operate. There are numerous options, including sole proprietorships, limited liability companies (LLCs), partnerships and corporations.
When it comes to incorporation in particular, there are two main options: a C corporation (C corp) and an S corporation (S corp). The structure you use depends largely on the type of business you run and your long-term goals.
There are some ways in which the two structures are similar to one other. For example, both offer limited protection against liability, which means shareholders of the corporation are not personally liable for any debts or other liabilities. Both C corps and S corps are separate legal entities established via state filing.
Both have directors, officers and shareholders, the latter of which are the owners of the company and in charge of electing the board of directors to oversee the corporation’s affairs. The directors then elect the officers to manage day-to-day operations. Finally, both are required to issue stock, adopt bylaws, hold annual shareholder meetings, file annual reports and pay certain annual fees.
There are also several ways in which the two types of corporations differ.
Perhaps the most significant difference between a C corp and an S corp is related to taxes.
C corporations are separately taxable legal entities. They must file a corporate tax return using Form 1120 and pay all taxes at the corporate level. There is the potential for double taxation if any corporate income gets distributed as dividends to company owners, as that would also be considered personal income. Any taxes levied on corporate income get paid first at the corporate level, and then at the individual level.
S corporations, meanwhile, are pass-through tax entities. These businesses file Form 1120S and do not pay any tax at the corporate level. All the profits and losses get passed through and reported at the individual level on the personal tax returns of the owners, with those owners responsible for paying due taxes individually.
In each case, however, personal income taxes are due both on salaries from the corporation and any dividends the owners receive.
Corporate ownership structure
A C corp does not have any restrictions on ownership. S corps, however, have a cap of 100 shareholders, and all must be residents and citizens of the United States. Additionally, S corps are not allowed to be owned by C corps, other S corps, LLCs, certain types of trusts or partnerships.
When it comes to distributing stock, S corps may only have one class of stock, while C corps can have multiple classes. Thus, C corps offer more flexibility when starting or expanding a business, as there are more ownership options available.
These are the primary similarities and differences between C corps and S corps. A skilled financial advisor will provide you with more information on which structure would be most beneficial for your needs.