• Alan J. Keossayan, Esq.

C-Corp Versus S-Corp


C-corporations and S-corporations have a lot in common. For instance, owners of both a C-corp and S-corp are called shareholders, and they elect directors to oversee business its operations. In turn, those directors hire officers whose job it will be to manage the day-to-day operations of the business. Both a C-corp and S-corp are formed by preparing and filing a document called the Articles of Incorporation, and filing registration documents with the Secretary of State.


Setting up a corporation provides it's owner(s) with limited personal liability. A corporation is legally a separate entity from the owners and as a separate legal entity, only assets of the corporation, not the owner's, are subject to corporate debts.


While, as stated above, there are some similarities between C-corporations and S-corporations, there are also various differences between them.


Formation

All corporations start their life as C corporations, meaning you must file and form a C-corp with the Secretary of State and then elect or convert the duly formed C-corp into an S-corp. A C corporation may be converted to an S corporation by filing IRS Form 2553. This is because the IRS does not recognize an S-corp as a valid entity.


Taxes


Perhaps the biggest reason people and/or business elect S-corp status is for tax purposes. When it comes to taxes there's a big difference in how a C corp and an S corp are taxed.


For federal tax purposes, C-corps are hit with something called "double taxation" which means the C-corp's profits are taxed, and are reported on the C-corp's tax return. Then, any after-tax profits that are distributed to its shareholders as dividends are taxed again, and are reported by the shareholders on their personal tax returns. This “double taxation” can be avoided by opting for S-corp status with the IRS. An S-corp. is treated similar to a sole proprietorship or a partnership meaning the profits and losses are "passed through" the S-corp. to the shareholder(s), and are only taxed to the shareholders and reported on their personal tax returns. This is commonly referred to as "pass-through taxation."


Ownership & Qualifications


A C corp. will provide more flexibility when it comes to selling a corporation's stock. According the IRS, a corporation that elects for S-corp status may not:


  • Have more than 100 shareholders

  • Issue more than one class of stock

  • Have shareholders who are not U.S. citizens or residents

  • Be owned by a C corporation, other S corporations, LLCs, partnerships, or various trusts


Generally, S -corps are preferred by small businesses which fit within the legal requirements for an S corp (as discussed above). Certain types of corporations find more advantages with a C corp. For example, having more than one class of stock can help a business raise capital from investors without giving them voting rights. However, whether a C corp. or S corp. would be best for your business is dependent upon careful analysis of various factors as they relate to your particular situation.


This post is intended to provide you with a brief and simply overview and understanding of the similarities and differences between C-corporations and S-corporations. As with any other area of law, filing corporate documents and electing for S-Corp status can get complicated and difficult to understand. Should you have any questions or concerns, please do not hesitate to contact us.

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