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Difference Between S-Corp and C-Corp

When starting a corporation, the first thing you need to do is register your business entity with the state. But, there are different kinds of corporate designations you’ll need to consider each with its own advantages and disadvantages depending on your business model.

What is a Corporation?

A corporation is a business structure intended to shield its members from liability such as lawsuits filed against the company. However, a corporation is a completely separate entity from its owners, and as such must follow many of the same rules and regulations that an individual does. Corporations can hire employees, pay taxes, borrow money, and engage in litigation.

Different Types of Corporations

There are three main types of corporations you can choose from when determining your business structure:

  • S Corp: An S Corp is so named because it files its taxes under Subchapter S, and has more limits on its structure than C Corps do. It also can be structured as a pass through entity which can limit tax liability
  • C Corp: C Corps are taxed under Subchapter C, and are completely separate from their owners. A C Corp has the least amount of limits imposed on it and provides the most opportunity for growth.
  • Non Profit: A Non Profit’s revenue must be used for charitable work and cannot be awarded to shareholders. If there is excess profit, it must be kept within the organization.

What is an S Corporation?

S Corps are a corporate business structure that are allowed to be set up as a “pass through” entity, meaning the profits and losses of the business pass through its members, and onto the individual’s personal tax returns.

Advantages and Disadvantages of S Corporations

Before creating an S corporation, it’s best to know the pros and cons of S corporations beforehand.

Advantages of S Corporations

  • Tax deductions: S Corps offer a lot of flexibility with filing taxes, and are often eligible for tax deductions that a C Corp is not.
  • Limited number of shareholders: S Corps are capped at 100 shareholders. In some cases, this can be seen as limiting, but it also helps to simplify the business model and tax structure.
  • Limited Liability: Even though the members of the S Corp funnel the company’s earnings through their own taxes, they are still sheltered from liability. This way their personal assets can never be pursued if someone files a lawsuit against the corporation.

Disadvantages of S Corporations

  • More difficult to create: Depending on the state, S Corps can incur more ongoing expenses and administrative costs. Furthermore, you’ll likely need an accountant who specializes in S Corps to assist each member when they file their taxes.
  • More scrutiny from the IRS: Because S Corps enjoy more tax flexibility they tend to be watched more closely by the IRS. You are more likely to be the subject of an audit if you form an S Corp than a C Corp.

What is a C Corporation?

A C Corp is the strongest corporate structure and one that offers the most freedom as far as growth and expansion. Because it’s an entirely separate entity from its members, it must file its own tax return and is subject to double taxation.

Advantages and Disadvantages of C Corporations

Before creating a C corporation, it’s best to know the pros and cons of C corporations beforehand.

Advantages of C Corporations

  • Unlimited number of shareholders: C Corps can have as many shareholders as they want and can also include shareholders and owners from outside the U.S. giving these corporations more flexibility with their business structure.
  • Deduct 100% of charitable donations: Because C Corps file their own return, they also enjoy the tax advantages that an individual does. One of these is the ability to write off 100% of their charitable donations. When used strategically, this can reduce overall tax burden.
  • Easy to form: The initial formation of a C Corp is rather simple and straightforward. And, because it will be filing a tax return of its own, it’s less likely to be audited by the IRS.

Disadvantages of C Corporations

  • Double taxation: The biggest disadvantage of C Corps is double taxation. This means that both the corporation and its members must declare the company’s profits.
  • More expensive: While forming a C Corp is easy, the maintenance to keep it up and ensure the taxes, business structure, and regulation are completed correctly can get very expensive.

What is the Difference Between an S Corporation and C Corporation?

Though both structures offer their members limited liability against any lawsuits, there are some major differences. The biggest difference between the two has to do with taxes. An S Corp doesn’t file a return of its own and instead the members report the company's profits and losses on their personal tax returns. This can make things more complicated, but also allows a bit more flexibility with how earnings are declared.

A C Corp must file its own tax return in addition to its members filing their personal return. If the company turns a profit and shares these earnings with its members, the corporation and the members must declare the profits. This is what’s known as double taxation.

Which Type of Corporation is Best for You?

Whenever you decide to form a corporation, you should always consult with a qualified CPA to discuss your options and tax implications. In general an S Corporation is better for a smaller business that knows it will stay in the U.S. Under S Corp regulations, shareholders are capped at 100 and they do not allow any non-U.S. members. You may also elect to be an S Corp if you know that corporate taxes are especially high in your state and can be avoided by operating as a pass through entity.

A C Corporation is usually preferred by larger businesses, and especially ones that are expected to grow and expand. There is no limit on the number of shareholders a C Corp can have, and its members can be both U.S. and international citizens. C Corps are also a good choice if you are doubtful of your company’s ability to hold up to tough scrutiny of the IRS.

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