What Are the Differences Between an S Corporation and a C Corporation?

S Corporations and C Corporations are two distinct legal structures for businesses in the United States, each with its own tax implications and operational requirements. Here's a breakdown of the key differences between them:

Formation and Structure

• C Corporation: This is the standard corporation under the IRS code. C Corps can have an unlimited number of shareholders and can issue multiple classes of stock. They are subject to corporate income tax.

• S Corporation: S Corps are designed for smaller businesses. They can have up to 100 shareholders (who must be U.S. citizens or residents) and can only issue one class of stock. S Corps are not subject to corporate income tax at the federal level.

Taxation

• C Corporation: C Corps face what is often called "double taxation." The corporation itself pays corporate income tax on its profits. Then, when profits are distributed to shareholders as dividends, those dividends are taxed again on the shareholders' personal tax returns.

• S Corporation: S Corps are "pass-through" entities for tax purposes. This means that they do not pay any corporate income tax. Instead, profits and losses are passed through to the shareholders' personal tax returns, and taxes are paid at the individual level. This avoids the double taxation faced by C Corporations.

Shareholders

• C Corporation: There is no limit on the number of shareholders, and shareholders can be other corporations or foreign individuals/entities.

• S Corporation: Limited to 100 shareholders, who must be individuals (with certain exceptions like trusts and estates), U.S. citizens, or permanent residents.

Ownership and Stock

• C Corporation: Can have multiple classes of stock, which allows for different voting rights and dividend rates among shareholders.

• S Corporation: Can only have one class of stock, meaning all shares have the same rights and privileges.

Flexibility and Requirements

• C Corporation: Offers more flexibility in terms of raising capital through the sale of stock. They also have fewer restrictions on ownership and management.

• S Corporation: Has stricter eligibility requirements and must adhere to the rules regarding the number and type of shareholders. They are often seen as less flexible in terms of raising capital due to the limitation on the number of shareholders and the single class of stock.

Management

• Both C and S corporations have similar management structures, including directors and officers. The requirements for corporate formalities, such as holding annual meetings and keeping minutes, apply to both types.

International Tax Issues

• C Corporation: More suited for companies that plan to do business internationally or attract foreign investors.

• S Corporation: Less suited for international business, as all shareholders must be U.S. citizens or residents.

When choosing between an S Corporation and a C Corporation, it's important to consider the size and scope of your business, your plans for expansion, and how you plan to distribute profits. Each structure offers its own advantages and disadvantages, particularly in terms of taxation and the ability to raise capital. Consulting with a legal or financial advisor is advisable to determine which structure best suits your business goals.