When you start a business, your choice of business entity is an incredibly important decision. The business type you choose will greatly impact you, your operation, your investors, and potentially your employees. It is important that you weigh your options when it comes to the entity type to ensure you make the right decision.
C-corporations are the most common type of business entity in the United States. C-Corporations are separate legal entities set up under state law to protect their owners' assets from liabilities arising from business activities (limited liability).
An S-corporation is a business entity that is more attractive to small business owners because it offers certain tax advantages. An S-corporation can be created after you have incorporated as a traditional C-corporation or limited liability company (LLC) by filing documents with your state and the IRS.
| Service: | Wyoming Corporation Formation |
|---|---|
| Cost: | $199 |
| Turnaround: | 24 Hours |
| What’s Included: | First Year Registered Agent and Business Address, Bylaws, Free Bank Account |
How C-Corporations and S-Corporations Compare
| OPTIONS | S-CORP | C-CORP |
|---|---|---|
| GENERAL (learn more) | ||
| Limited liability protection for directors, officers, shareholders, and employees | ✅ | ✅ |
| Attracts investors by selling shares of stock in the corporation | ✅ | ✅ |
| Continues to exists if the owner leaves or passes away | ✅ | ✅ |
| Requires board of directors | ✅ | ✅ |
| TAXATION (learn more) | ||
| Taxed once - Pass-through entity for tax purposes (income passes through shareholders/owners to be taxed at the personal level) | ✅ | |
| Taxed Twice - Subject to double taxation (taxed at corporation and personal levels) | ✅ | |
| OWNERHIP (learn more) | ||
| No more than 100 shareholders allowed | ✅ | |
| Unlimited number of shareholders allowed | ✅ | |
| Restrictions on shareholder eligibility (allowed - U.S. citizens, permanent residents, and some qualified trust; not allowed - nonresident aliens and legal business entities) | ✅ | |
| No restrictions on shareholder eligibility | ✅ | |
| CLASSES OF STOCK (learn more) | ||
| One class of stock (common stock) | ✅ | |
| Multiple classes of stock (preferred stock) | ✅ | |
C-corporations and S-corporations are similar in that they both:
- Provide their directors, officers, shareholders, and employees with limited liability protection;
- Can attract investors by selling shares of stock in the corporation;
- Can enjoy perpetual existence as they can continue to exist even if the owner leaves or passes away;
- Must have a board of directors; and
- Must have annual board meetings and file annual reports.
However, there are several significant differences between C-corporations and S-corporations. One key difference is a C-corporation is a distinct type of business structure where articles of incorporation must be filed along with other necessary documents with the secretary of state, electing corporate directors, issuing stock, and drafting corporate bylaws.
On the other hand, rather than a distinct type of corporate business structure, an S-corporation is a federal tax status that can be elected after forming a traditional C-corporation or LLC. Corporations that meet certain requirements can elect S-corporation status by filing Form 2553 with the IRS.
Other differences between c-corporations and s-corporation relate to the following:
- Taxation;
- Ownership; and
- Stock
Taxation
One of the biggest differences between a C-corporation and an S-corporation is how the two are taxed. C-corporations are subject to what is referred to as double taxation. Income is earned by the corporation, and it must pay business taxes on that income. Then profits are distributed to the corporation's individual shareholders as dividends, where it is applied to personal income taxes.
In essence, the income earned by the C-corporation is taxed twice: once at the corporate level and then again at the personal level. Hence, the term double taxation.
On the other hand, an S-corporation has tax benefits because it is considered a pass-through entity for tax purposes because the income passes through to the shareholders or owners and is taxed only at the personal income tax return level.
The S-corporation must still report the income, but taxes are only payable at the shareholder or personal level. Thus, with an S-corporation, there is no double taxation.
Ownership
Another difference between a C-corporation and an S-corporation is the legal requirements for ownership. An S-corporation cannot have more than 100 shareholders, unlike a C-corporation, which can have unlimited shareholders.
Furthermore, there are shareholder restrictions on ownership in an S-corporation. Eligibility requirements for types of shareholders include: U.S. citizens, permanent residents, and some qualified trusts can own shares in an S-corporation. However, nonresident aliens and legal business entities, such as corporations and LLCs, cannot own stock in an S-corporation.
There are no shareholder restrictions whatsoever on who can own interest in the corporation if it is a C-Corporation.
Classes of Stock
An S-corporation can only have single stock of class, known as common stock. However, a C-corporation can have multiple classes of preferred stock conferring different rights and obligations upon the shareholder.
Is a C-Corporation or S-Corporation Better for You?
For most small businesses, an S-corporation is the better option. Forming a corporation can be complicated regardless of which business entity type you choose. An experienced business attorney can help you select and form the right business entity for you based on your business goals.
If you have more questions about the differences between a C-corporation and an S-corporation or how to form one or the other, contact us to arrange a consult with an experienced business lawyer.
