Difference Between S Corporation and C Corporation

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If you are looking to set up a business by incorporating an entity in the U.S., you will be required to decide between C Corp and S Corp. The question now arises why? The answer is per Internal Revenue Code (I.R.S.) where it defines S CorporationS CorporationS corporation refers to the special status entity exempted from paying corporate tax, which allows shareholders to be taxed only once when they receive the benefits by follow-through taxation, thereby avoiding double taxation at the corporate level under a special chapter of IRS so that all the rules specified in the chapter shall be complied with.read more as any business that chooses to pass on tax liability on its shareholders.

Under a C Corporation entity is taxed separately from owners or shareholders. However, while incorporating the C Corporation, you will be noticing that – nowhere on its Articles of IncorporationArticles Of IncorporationArticles of incorporation are also known as a corporate charter or a certificate of incorporation, and it can be defined as a set of documents that are filed with a government institution for the purpose of legally documenting the foundation of a company. It is mandatory for the ones who are willing to incorporate a business.read more does it mention these types of corporations. This is because the state corporation law you form under doesn’t distinguish between C Corp or S corp. It’s the I.R.S. that distinguishes, not the state corporate office.For S Corp, the owners, i.e., shareholders, are supposed to report their income and losses on their tax returns, where they will be assessed at an income tax rate at an individual level. When this occurs, the corporation’s income is not taxed at the shareholder and corporate income levels, so double taxationDouble TaxationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level.read more is avoided. For example, Jacks, Inc. was formed as an S corporation in Florida, where Robert owns nearly 51% of the corporation, and Brenda owns nearly 49%.

C Corp vs S Corp Infographics

Let’s see the top differences between C Corp vs S Corp.

Key Differences

  • The major key difference is that S Corporation is a pass-through tax entity, whereas C Corp is taxable. Hence as mentioned earlier, C Corp faces double taxation, and for S Corporation, any tax due is paid at an individual level by the owners’ pro-rata basis.The shareholder’s limit is 100 for S Corp, while there is no limit for C Corp.C corporations will be required to hold at least one meeting every year for shareholders and directors. In contrast, S Corporation is also required to hold scheduled meetings of directors and shareholders.As per the I.R.S. requirement, foreigners can’t be shareholders for S Corporation, while C Corp has no such need.Income and losses must be allocated according to the percentage of ownership for S Corp, whereas there is no such requirement for C CorporationC CorporationAccording to US tax laws, any corporation that is not a S corporation is considered a C corporation, which has a different legal status and is taxed accordingly. It has its own articles of incorporation that defines its activities and is held by the shareholders, while its liability is limited.read more.C Corporation is a type of structure where there are no limits on shareholders and allows issuance of multiple classes of stock and while for S Corporation, you can only issue one class type of stock.For S Corp, the taxable business income can be split into distribution income and salary income. Only the salary part will be liable to self-employment taxSelf-employment TaxSelf-employment tax is the tax towards social security and Medicare, paid by a self-employed person who has net earnings of $400 or more for the concerned tax period towards the federal government reported through form 1040 schedule SE.read more, thus helping in reducing the overall tax burden. No such differentiation is required in C Corp.Per I.R.S., ‘Generally, an S corporation is exempt from federal income taxesFederal Income TaxesFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more except for the capital gains taxes and passive incomePassive IncomePassive income is the cash flow generated by an individual with minimum or no effort at regular intervals. It gives them additional financial security while requiring some amount of hard work initially, such as maintaining rental properties, making investments, upgrading products, etc.read more. It is treated similarly as the partnership, in that generally, taxes are not required to be paid at the corporate level.’ C Corp pays taxes on all income.

C Corp vs S Corp – Comparative Table

Conclusion

The choice of entity structure will have a huge impact on multiple aspects of your business, ranging from financing to taxes to growth strategies. Looking at the differences between your options may help you overcome a decision that best suits your business needs and goals.

Many U.S. companies use the S corporation structure’s tax savings and limited liability. Compared with partnerships, S corporations have an edge on aspects like continuing business and transferring ownership. As a result, a C corporation can be a fruitful business setup. It provides limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more for the business owners, allows comparatively more freedom of stock purchasing, permits tax breaksTax BreaksA tax break is a tax benefit or tax concession allowed by the government to encourage businesses to increase their investments, ultimately boosting the economy. It comes in a variety of ways, such as claiming tax deductions or excluding profits from tax returns.read more and other benefits.

This has been a guide to C Corp vs. S Corp. Here we discuss the top difference between the two terms and infographics and a comparative table. You may also have a look at the following articles –

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