Tax Differences Between an S-Corp and C-Corp
When establishing your company or reorganizing it, the owner or group of owners forming a corporation may elect to form either a C or S corporation. The C-corporation has long been the standard corporate structure in America and offers owners many advantages. The S corporation on the other hand is a subset of corporations, an entity with a special tax status, defined in Subchapter S of the Internal Revenue Code – hence the “S-corporation”. C and S corporations share many qualities, yet differ in substantial ways.
- The IRS treats C corporations and S corporations as individual legal entities under the law. Both C and S corporations begin as standard corporations with the same tax filing requirements.
- Both C and S types are owned by shareholders, are governed by directors who are elected by shareholders and are managed by officers elected or appointed by boards of directors.
- Both C corporations and S corporations may continue to exist even after their owners die.
- Ownership of both C and S Corporations may be transferred by selling shares of the company’s stock. Selling shares of stock can raise additional capital.
- C and S corporations both provide limited liability protection for shareholders. In the event the company fails, shareholders aren’t normally held responsible for the debts and obligations of the corporation.
- When shareholders receive income from the corporation as dividends or salaries, shareholders of both C and S corporations have to pay personal income tax.
- Employee benefits provided by C and S corporations are tax deductible by the company and tax-free to regular employees. Tax-free benefits include life and medical insurance, education and retirement plans and childcare are all deductible.
- Many of the same state laws apply to both C and S corporations regarding organization, structure and operation of the company. Both must adopt bylaws, maintain shareholder records, record minutes of shareholder and board meetings, prepare and file required state and federal reports.
- Owners of both C and S corporations can lose their limited liability protections if a court finds they haven’t followed state regulations and procedures. You must operate as a corporation legally or owners could be held liable for corporate indebtedness in the event things go badly for the company.
- C corporations are taxed on earnings as single entities at the corporate rate. If a C corporation then distributes earnings as dividends or salaries to shareholder/owners, the shareholders are then taxed a second time at the individual rate, when they file their personal income taxes. If C corporation shareholders elect to operate as an S corporation income is only taxed on the shareholder’s personal taxes and not on the corporation as a whole. The S corporation offers limited liability like a C corporation with the added benefit that profits only get taxed once.
- C and S corporation tax forms look different. S corporation income statements, for instance, don’t show federal income tax expense or deferred tax assets or liabilities on the balance sheet.
- C corporations, especially private ones tend to pay large salaries to shareholder-employees instead of paying large dividends. Salaries can be deducted that way. Dividends can’t. It’s a way to distribute cash to shareholders while minimizing the double taxation problem. S corporations tend to prefer to pay dividends over large salaries because S corp dividends aren’t taxed twice. C corporations often appear less profitable than comparable S corporations because of these tax strategies.
- A C corporation must provide fringe benefits to 70 percent of its employees in order to deduct fringe benefits provided to shareholders employed by the company. Shareholders employed by an S corporation who own more than 2 percent of the company cannot deduct fringe benefits at all.
- Anyone can own shares of a C corporation. Individuals from any country, corporations, sole-proprietorships or partnerships, domestic or foreign may own shared of a C corporation. S corporations can only be owned by individuals who are U.S. citizens. S corporations cannot be owned even partially by other business entities, whether corporations, sole-proprietorships, partnerships. C corporations can operate global operations and may have to file tax documents in multiple countries. S corporations are U.S.-based. They may have foreign business customers and connections but they file taxes only in the U.S. and cannot operate as an international entity.
- S corporations cannot have more than 100 shareholders as participatory owners of the company. S corporations pass through profits to shareholders who pay taxes on company profits as individuals. C corporations can have as many shareholders as they want and pay corporate taxes before distributing dividends to shareholders who then pay taxes on the dividends.
- S corporations can only issue a single class of stock. C corporations can issue multiple classes with different voting privileges and profit levels for each class of stock ownership.
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