S Corp is a standard business. They opt to pass business interest, loss, debits, and credits through their owners for allied tax pretexts. S corporations do not pay tax on the business income twice. This is a huge benefit as they avoid double taxation.
Key Takeaways
- S Corps are pass-through entities, with profits and losses flowing to shareholders’ tax returns. C Corps face double taxation, with profits taxed at corporate and individual levels.
- S Corps have stricter eligibility requirements, limited to 100 shareholders and one class of stock, while C Corps can have unlimited shareholders and multiple stock classes.
- S Corps are beneficial for small businesses seeking to avoid double taxation. C Corps offer more flexibility in ownership and stock options, benefiting larger businesses or those seeking outside investment.
S Corp vs C Corp
The difference between S Corp and C Corp is that S Corp doesn’t pay taxes. C Corporation pays tax on its income.
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S corporation is not a business entity type but a tax designation. You need to apply to IRS to become one of the S corporations. C Corp is a valid system for an organization. Shareholders or owners are taxed differently from the entity.
The shareholders of a C-Corp own the business, but they don’t make most of the decisions. The policy issues and management are left to the shareholder-elected board of directors.
Comparison Table
| Parameter of Comparison | S Corporation | C corporation |
|---|---|---|
| Ideal for | Ideal for mature businesses looking to share profits with their owners | Perfect for new and growing businesses. Those who intents to reinvest gains back into the firm |
| Restrictions on Shareholders | They have no more than 100 shareholders. They have an exclusive set of assets. They must be a local partnership. | C corporations have no restrictions |
| How they are seen by outside investors | Because of the pass-through entity, they are seen as unfavourable. | They are seen as favourable because they have few restrictions. |
| Required IRS tax forms | S Corp requires Form 1120S- U.S. Income Tax Return. Form 1120W-W- Estimated Tax for Corporations. Form 941 – Employer’s Quarterly Federal Tax Return | Form 1120S – U.S. Corporation Income Tax Return Form 1120-W- Estimated Tax for Corporations Form 941- Employer’s Quarterly Federal Tax Return |
| How are they taxed | S Corporations are taxed once- their profits go to the owners | C Corporations are taxed twice. One taxation at the corporate level and another at the personal level. |
| How each is created/formed | S Corp comprises fundamental. They then submit a request to the IRS by complying with Form 2553 | They file a license for constituting a company in your state. |
What is S Corp?
S Corp is a legal partnership. It makes a lawful vote to be imposed a toll under Subchapter S of Chapter 1 of the Internal Revenue Code.
S corporations have limited liability for shareholders, just like C-Corps. These businesses can take advantage of pass-through taxation.
The profits and losses of S corporations are reported on the owner’s tax returns. There is no corporate income tax levied on S Corps.
The compliance obligation and documentation are similar to C Corps. S Corp needs to file its articles of incorporation and issue stock.
They also need to hold shareholder and director meetings and more. But they have limited ownership and limited stock flexibility.
What is C Corp?
C Corp is any corporation taxed differently from the owners. The taxation of gains is done at the corporate level. Profit distributions to shareholders in the form of dividends are also taxed.
Shareholders own c-Corporation, but they don’t make most of the decisions. The official daily duties of the business lie in the hands of the officers of the C-corporation, like the CEO.
To structure your business as a C corporation, you must register incorporation articles with the state government.
C Corp can have a lot of shareholders. They can also quickly raise money as they can issue many classes of stock to an unlimited number of shareholders. But they pay more in taxation due to double taxation.
Main Differences Between S Corp and C Corp
Formation
To form your company as an S Corp, you need to fill out IRS FORM 2553. After the registration, you become an S-Corp for federal tax purposes. To be treated as S Corp for state tax, you need to file extra papers at the state level.
The C Corp is a non-remittance type of corporation. It becomes an ordinary C Corp when you submit reports of constituting a company with the secretary of state.
Ownership
S Corp is limited to up to a hundred shareholders. Shareholders must be resident aliens. Besides, there is no variation between shareholders. This makes it hard to raise funds.
C Corp has an unlimited number of shareholders and several classes of shareholders. This provides more flexibility for developing the business.
Taxation
S corporation has a unique tax classification. Shareholders of S Corp report their share of the business profit and losses on their personal tax return.
They pay tax once at the personal income tax rate as a shareholder of S Corp; your business income tax is deducted at a personal level. This is when you file Form 1120S.
C Corp is double-taxed. The first taxation takes place at the corporate level when shareholders file corporate income return tax Form 1120.
The second taxation is done on the owner’s income tax returns. But this is when the corporate profit is distributed as a dividend to shareholders.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
