C Corp vs. S Corp

Brad Smith • December 2, 2020

One of the most common options business owners evaluate is whether to form a C Corporation or an S Corporation. The choice depends on your business goals.

Similarities

The C Corporation is the standard corporation, while the S corporation has a special tax status with the IRS. It is defined in Subchapter S of the internal Revenue Code. To choose S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met. C corporations and S corporations share some of the same qualities.

Limited liability protection: Both corporations offer a limited liability protection, so owners are typically not personally responsible for business debts and liabilities.

Separate entities: Each corporation is a separate legal entity created by a state filing

Filing documents: Formation documents must be filed with the state. The Articles of Incorporation and Certificate of Incorporation are the same for both C and S corporations.

Structure: Both have shareholders, director and officers.

Corporate formalities: Both corporations are required to follow the same internal and external corporate formalities and obligations such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports, and paying annual fees.

Differences

Taxation: This is the most significant difference for small business owners when evaluating C and S corporations.

C corporations file a corporate tax return (Form 1120) and pay taxes at the corporate income is distributed to business owners as dividends, which are considered personal income.

S corporations file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are “passed-through” the business and reported on the owners’ personal tax returns.

Corporate Ownership: C corporations have no restrictions on ownership, but S corporations do. S corporations are restricted to no more that 100 shareholders and shareholders must be US citizens/residents.

S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. S corporations also have only one class of stock, while C corporations can have multiple classes. C corporations provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.

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