Business Formation Types
S Corp vs. C Corp
Explore the key differences between S Corporations and C Corporations in our detailed guide, helping you choose the right corporate structure for your business needs.
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As you embark on the adventure of forming a new business, you’ll learn that there are a number of business entities to choose from. Depending on your business’s needs, you might consider forming a corporation, limited liability company (LLC), partnership, or sole proprietorship. As you explore these options, you may find yourself considering the merits of an S corp vs. C corp and wondering about the difference between the two.
What are S corps and C corps?
C corporations and S corporations are different tax designations available to corporations. Each has its pros and cons, and the best choice for you will depend on the circumstances of your individual business. Here, we provide an overview of what is an S corp vs. C corp to get you started. However, if you have additional questions about which is right for you, consider consulting a lawyer or tax professional.
When you’re ready to set up your C corp, we’re here for you with our Corporate Formation Services. If you wanto start a limited liability company (LLC) with S corp status, our S corporation service can help you with that. Our suite of business services can help you start a business and keep it running with our Worry-Free Compliance service.
How do S corps and C corps differ?
The first thing most people think of when examining the benefits of an S corp vs. C corp is tax advantages. When you form a corporation, it will be taxed as a C corporation by default. This means it will be subject to corporate double taxation. With double taxation, the corporation’s profits are taxed first at the company level and then again on the personal income tax returns of its shareholders. Want to know more specifics about what a C corp is? Review our C corp definition page.
An S corporation, on the other hand, is a pass-through entity. This means the corporation’s income passes through to the individual shareholders and is taxed only on their personal tax return. To designate your corporation as an S corp, you must file Form 2553 with the Internal Revenue Service (IRS).
Apart from tax considerations, however, there are a number of pros and cons of an S corp vs. C corp to keep in mind.
What are the advantages of a C Corp?
Even though C corps are subject to double taxation, they have several advantages over S corps:
- Fewer restrictions and more flexibility
- Can go public
- Can have more than one type of stock
- Easier to raise capital
- Fewer limits to growth
- Can have foreign shareholders
Depending on your goals as a business owner and the size of your business, you may find that these advantages outweigh the tax benefits of an S corp.
Who should file as a C corp?
If you have big plans for the future growth of your business and want to keep your options open, a C corp might be the right choice for you. C corps offer the most flexibility when it comes to options for raising capital and growing your business.
Businesses that intend to reinvest their profits rather than distribute them as dividends may also benefit from C corp status. This avoids double taxation because the profits are taxed only at the corporate level and not on the business owners’ individual income taxes. If owners are in a high tax bracket, this may be particularly advantageous.
What are the advantages of an S corp?
For many businesses, S corps offer a number of advantages over C corps, including:
- Pass-through taxation
- Can pass losses to owners, who can claim them as a deduction on their taxes
Remember that an S corp is a tax election rather than a separate corporate entity. You can elect S corporation status whether you have a corporation or an LLC. However, it’s important to keep in mind that not all businesses have the option of filing as an S corp.
What else do I need to consider about S corps?
To take S corporation status, your business must meet specific requirements:
- Can issue no more than one class of stock
- All shareholders must be U.S. residents, estates, trusts, and tax-exempt organizations. (However, an S corp can own other businesses.)
- Can have no more than 100 shareholders
- Must be a domestic business entity
- Can’t have ineligible shareholders, such as financial institutions or insurance companies
If your business doesn’t meet these requirements, the IRS will terminate your S corp election.
Also, keep in mind that S corp status is primarily a federal tax election. Although many states allow you to take S corp status for state tax purposes, others don’t provide that option. In those states, your corporation may be subject to double taxation when it comes to state taxes even though you will benefit from pass-through taxation on your federal taxes.
Who should file as an S corp?
Small or new businesses may benefit the most from filing as an S corp. This is especially so if they anticipate having losses at the outset because owners can claim the losses as a deduction on their individual taxes, reducing their overall tax burden. This isn’t possible for C corps.
How do I choose the right structure for my small business?
Assessing the advantages of a C corp vs. S corp for a startup can be particularly challenging because you have so many other decisions on your plate. However, it’s important to Compare Business Structures as you’re forming a new business.
Choosing the right business structure can save you a lot of money in the long run, either by reducing your taxable income or protecting your personal assets through liability protection. The entity you choose can also affect your ability to raise capital and grow your business.
The best type of business structure depends on the individual circumstances of your business. If you’re uncertain about the best entity for you, a tax professional or attorney may be able to give you advice tailored to your individual circumstances.
If you’re considering an S corp, review our information about how to calculate your S corp taxes to help you determine whether electing S corp status makes sense for you. As we mentioned above, an S corporation is a good choice for many small businesses. As your business grows, you can change your tax election from S corp to C corp if you find yourself needing the additional flexibility of a C corp.
Now that you know all you need, what do you choose?
C corps are taxed separately from their owners. The profits of a corporation are taxed twice, first at the business level and again at the individual shareholder level. S corps, on the other hand, pass profits and losses onto its shareholders, avoiding double taxation and giving the shareholders an opportunity to write off losses on their individual tax returns.
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How do I form a C corp?
If you decide a C corp is best for you, you’ll need to take the following steps to form your business entity (these will vary somewhat by state):
- Choose an available name
- Form your initial board of directors
- Choose a registered agent
- File Articles of Incorporation with your state
- Draft and sign corporate bylaws
- Create a corporate record
- Hold an initial director/shareholder meeting
- Prepare a shareholder agreement and issue shares
- Apply for required permits and licenses
- Obtain an Employer Identification Number (EIN)
We can help you through this process with our business formation services.
How do I form an S corp?
To elect S corporation status, you must first form either a corporation or an LLC. Once your LLC or corporation formation is approved by your state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status.
The Internal Revenue Service requires you to complete and file your Form 2553:
- Within 75 days of forming your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect
OR
- At any time during the tax year preceding the tax year the election is to take effect.
If you’re forming an LLC with S corp election, our business experts can help.
How can we help?
Whether you’re just starting out or have an established business, our slate of business services is here for you. When you’re ready to form your business entity, we can help you get your business up and running in no time with our business formation services.
Administering your business will be a breeze with the ZenBusiness Money App. And we’ll help you stay on top of state requirements with our Worry-Free Compliance Service. We want you to have the time you need to focus on what’s important to you — making your business a success.
To elect S corp status, you need to file Form 2553 with the IRS.
To change how your corporation is taxed, you need to notify the IRS. If you want to change your default tax status to S corp status, file Form 2553. If you want to stop being taxed as an S corp, you need to submit a statement of revocation to the IRS with shareholder signatures representing the majority of the corporation’s shares.
An S corporation can hold stock in a C corporation, but it can’t own more than 80% of the stock. C corporations can’t be shareholders of S corporations.
A non-profit is neither a C corp nor an S corp. Rather, it’s classified as a 501(c) entity under the Internal Revenue Code.
Healthcare benefits are taxed differently for C corps and S corps. Typically, S corps can deduct the cost of healthcare benefits for employees. However, shareholders owning more than 2% of stock in the S corp must include insurance costs paid by the company for them or their family members as income. C corps, on the other hand, can deduct the cost of health insurance paid for both employees and owners.
A corporation must typically indicate that it’s a corporation in its business name, using a designator such as “Co.,” “Corp.,” or “Inc.” However, it doesn’t need to indicate whether it’s an S corp or a C corp. That designation shows up only on the company’s tax forms.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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