S Corp and C Corp: What Are The Key Differences?

What are S Corp and C Corp?

S corp and C corp are two of the most common types of business entities in the United States. In Delaware, the most prevalent US state for business entity formations, there were 62,510 corporations established in the state in 2021.

C corps are traditional corporations that are taxed under the regular corporate tax rules. On the other hand, S corps are organized as regular corporations under state law, but they elect to be taxed under Subchapter S of the Internal Revenue Code. This allows S corps to avoid double taxation on their income.

Understanding what an S corp is can help you get a better overview of how your business is structured and the different benefits that come with this type, compared to C corporations and others.

S Corp vs C Corp: What are the differences?

Structure size

S corps are typically smaller businesses, and they often have just one or a few shareholders (must be less than 100 shareholders). S corp shareholders must be US citizens or residents aliens and can have only one class of stock.

C corps are larger and more complex businesses than S corps. C corp is a corporation that can have an unlimited number of shareholders.

Formation

Once you’ve decided on the best structure for your business, S corp or C corp, you’ll need to file the appropriate paperwork with the state and federal government.

For incorporating a C corp, you’ll need to file articles of incorporation with your state government. To become an S corp, you’ll need to file articles of incorporation and must submit Form 2553 with the IRS. This form must be filed by all S corps, regardless of size or revenue. The requirements for this vary from state to state, so be sure to check with your local government for specific requirements.

Taxation

S corps have some advantages over C corps, including pass-through taxation. S corps are taxed as pass-through entities, meaning that the business is not taxed on its income. Instead, the income is “passed through” to the shareholders, who then report it on their personal tax returns.

S corps also have flexibility in how they can distribute their profits and losses. S corps are exempt from federal tax on most earnings – with a few exceptions for capital gains and passive income – so they can distribute more profits to shareholders. What other S corp advantages and disadvantages may you want to consider? Check out the related blog article for further details.

C corp shareholders, on the other hand, are subject to both corporate and personal taxes on their dividends. The corporation must pay taxes on its income, and then the shareholders must pay taxes on the dividends they receive from the corporation. Corporations in the U.S. are taxed flat at 21%. Dividends or capital gains distributed to shareholders after corporate tax are taxed again at individual rates. Find out more: C corp in the US and its pros and cons

Corporate ownership

In exchange for S corps tax benefit, the IRS imposes certain restrictions on this legal business structure. S corps must meet certain eligibility requirements, such as having no more than 100 shareholders and being owned only by U.S. citizens or resident aliens. S corps are also not allowed to have non-resident aliens as shareholders, and can’t be owned by other corporations or partnerships.

Paperwork and compliance

Corporations in the US tend to face stringent requirements, namely record-keeping requirements, maintaining corporate minutes and keeping track of shareholder meetings, and filing an annual report with the state. C corps must file annual reports, or tax returns, with the IRS (Form 1120). The tax return must include information on the corporation’s income, expenses, and assets. Similarly, S corps are required to submit yearly reports, but in a different form – tax return Form 1120-S detailing their finances and shareholder’s share of income, amount of pass-through income.

S Corp and C Corp similarities

Limited liability protection. S corp and C corp are both business entities that offer limited liability protection to their owners. This means that the owners of these businesses are not personally liable for the debts and liabilities of the business.

Separate legal entities. Both are separate legal entities, meaning that the S corporation and C corporation exist as their own entities, independent from their owners. S corp is separate from its shareholders for tax purposes.

Corporate management. Both S Corp and C Corp have a Board of Directors that make business decisions and an executive team that manages the day-to-day operations. S Corp and C Corp have filing requirements with the state in which they are incorporated, and annual meetings are also required for both.

S Corp or C Corp: which one is better and how to decide?

The below table summarizes key disparities between S Corp and C Corp.

S Corporation	C Corporation
Taxation on a single level	Double taxation
20% qualified business income deduction (tax deduction)	Certain types of business-level tax deductions are only for C-corporations, such as charitable donations and fringe benefits
Pass-through entity	Not a pass-through entity
Shareholder and ownership restrictions Limited number of shareholders Preferred stock not allowed Transfer restrictions	Flexible ownership Unlimited number of shareholders No restrictions on ownership and classes Issuance of preferred stock allowed
Not ideal for IPO planning and sales of shares with more than 100 shareholders	High chance of raising capital, easy equity financing

How to form S Corp and C Corp

To form an S corp, you will need to file Articles of Incorporation with your state and obtain an Employer Identification Number (EIN) from the IRS. You will also need to file S corporation election form 2553 with the IRS.

C corp formation includes many of the same steps. You will need to comply with state laws regarding corporate formation. After choosing the company name and deciding on the registered agent, you’ll need to file Articles of Incorporation (sometimes called a Certificate of Incorporation) with the state and pay filing fees.

How to convert C corp to S corp?

If you’re running a C corporation, you may be wondering if it’s possible to convert to an S corporation. The answer is yes, but there are a few things you need to know before making the switch. Converting from C corp to S corp can save you money on taxes. With an S corporation, you only have to pay taxes once, at the shareholder level, which can be a significant saving, particularly if your corporation is profitable.

Make sure your corporation meets certain eligibility requirements to become an S corp. Then, you’ll need to file Form 2553 with the IRS to elect S corporation status. Once you’ve made the switch to an S corporation, you need to start operating as one and following all of the S corporation rules.

Conclusion

When choosing between an S corp and a C corp, it’s important to consider the size and complexity of your business, as well as your long-term goals. S corps may be a good choice for smaller businesses that want to avoid double taxation, while C corps may be a better choice for larger businesses that need the flexibility of the corporate structure.

S corps and C corps also have different tax implications, so it is important to consult with a professional team to determine which type of corporation is right for your business.

Don’t hesitate to get in touch with our team via service@bbcincorp.com for more professional support.

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