Difference Between C Corp vs S Corp
Forming a company structure and getting it registered is in itself is a difficult task to be dealt with. When an individual starts a business he should get it registered with the concerned authorities under a corporate structure or an LLC structure. When registering for a company the founders should also consider whether to get a company registered as a C corporation or an S corporation for income tax purposes which sometimes becomes very critical. In this C Corp vs S Corp article, we will try and understand the key differences between C Corp vs S Corp.
Head to Head Comparison between C Corp vs S Corp (Infographics)
Below is the top 6 difference between C Corp vs S Corp
Key Differences between C Corp vs S Corp
Let us discuss some of the major differences between C Corp vs S Corp:
- The key difference between S Corp vs C Corp is that under C Corp the corporation pays the income tax for the current year due whereas in S Corp the individual pays income tax on the percentage of their shareholding in the corporation and income tax is not charged at the corporation level
- Under C Corp corporation is treated as a separate legal entity and the income tax is filed under Form 1120 and tax is paid at the corporate level. Although this gives rise to double taxation if the profits which are earned by the business are distributed among the partners they will also have to pay taxes on the profits earned from the corporation. On the other hand, under S Corp it is treated as a pass-through entity and income tax is filed under form the 1120S but no income tax is paid at the corporate level
- The profit and loss under S Corp are pass through by the business to the partners. These profit and loss are instead paid at the individual level by the owners of the business, but no tax is paid at the corporate level. Whereas Under C Corp tax is paid by the corporate and again at the individual level on the profit/loss earned by the business
- With both C Corp and S Corp income tax which is due is both on the salaries drawn by the partners and also on the dividends which are received from the corporation
- Under C Corp the shareholders the corporation is treated as a limited liability partnership which simply means that the partners are not personally liable for the debts or obligation of the business hence having limited liability towards the business. On the other hand, in S Corp the partners can be held personally liable for the debts and the obligations of the business which is why most of the companies opt for C Corp for ownership and taxation purposes
- Under C Corp it is a default type of Corporation when a company file articles of incorporation with the secretary of the state the company becomes a standard C Corp. On the other hand, under S Corp one must file for IRS Form 2553 after filing the form the partner will become an S Corp for the federal tax purposes.
C Corp vs S Corp Comparison Table
Let’s look at the top 6 Comparison between C Corp vs S Corp
|
C Corp |
S Corp |
| The default type of corporation like most of the corporations function under the USA | S Corp needs to be elected by filling for form 2553 |
| In C Corp there is a corporation tax and also income tax on the dividends received form profits | In S Corp tax is charged on the personal income tax on profits |
| C Corp is better for raising venture capital | When a company decides to elect for S Corp it becomes hard to raise venture capital for the business |
| Unlimited shareholders, multiple classes of stock | 100 or fewer shareholders, one class of stock |
| Both US and foreign shareholders are fine to be filled as a C Corp | In S Corp the individual should be a US citizen or resident only |
| Double taxation under C Corp structure both at the corporate level and at the personal level | No double taxation policy exists when a company files for S Corp structure |
Conclusion –
Selecting between both the above methods can have an impact on the business long-term plans and growth strategies of the corporations. Looking at the differences and the options the owners of the business should be clear whether to file for C Corp or S Corp which also depends on factors like the stage of the business, long-term plans of the business and the amount of capital the owners intend to invest in the business. Generally, S Corp is more popular with smaller businesses because of likely tax savings and C Corp is popular with larger companies because of the greater flexibility to raise capital.
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