What is the Difference Between C Corporations and S Corporations?
As in any other pursuit, one of the most important keys to success as a business owner perspective and information. With many restrictions and regulations on business formations, it is important to know what type of corporation your business qualifies as, what your limitations are at that point and when it can move on to the next identity.
Many small businesses make the choice between a C corporation (C corp) and an S corporation (S corp) when starting a business or changing the business structure. These two options share many similarities and also have several distinct differences, but both are viable options depending on the goals of your business.
C Corp & S Corp Similarities
Some of the similarities shared between C corps and S corps include:
- Both are considered separate legal entities.
- Similar tiers of structure: shareholders, board of directors, and officers.
- Both are required to follow corporate formalities and obligations.
- Offer limited liability protection to shareholders for business liabilities and debts
- Articles of Incorporation/Certificate of Incorporation filed with the state.
- Personal income tax due on salaries drawn and dividends received.
Differences Between C Corps & S Corps
There are a few key differences between C corps and S corps to consider, and they include:
- C Corps: Taxes are first paid at corporate level and again at individual level (Form 1120).
- S Corps: Profits/losses are passed through the business and paid on individual owners' level (Form 1120S).
- C Corps: No restrictions on ownership. Multiple classes of stock available.
- S Corps: Restricted to no more than 100 shareholders. Can only have one class of stock. Cannot be owned by C corps, other S corps, LLCs, etc.
Choosing a C corp or S corp structure depends on your business goals and state law. Consulting with an attorney experienced with corporate law can help you determine which if C corp or S corp classification is right for your business.