7 Differences Between C Corp and S Corp You Need to Know

If you are starting a business, one of the most important decisions you have to make is choosing the right type of entity for your company. There are many factors to consider, such as taxation, liability, ownership, and management. Two of the most common options are C corporation (C corp) and S corporation (S corp). But what are the differences between them and how do they affect your business?

In this article, we will explain the main features and benefits of each entity, as well as the drawbacks and limitations. We will also provide some examples of businesses that are suitable for each type of entity. By the end of this article, you will have a clear understanding of the differences between C corp and S corp and how to choose the best one for your business.

What is a C Corporation?

A C corporation is a legal entity that is separate from its owners, also known as shareholders. A C corporation can have an unlimited number of shareholders, who can be individuals or other entities. A C corporation is taxed at the corporate level, meaning that it pays income tax on its profits. The shareholders also pay income tax on the dividends they receive from the corporation, resulting in double taxation.

A C corporation has a board of directors that oversees the management and direction of the business. The board appoints officers, such as the president, CEO, CFO, etc., who run the day-to-day operations of the business. The shareholders have limited liability, meaning that they are not personally responsible for the debts or obligations of the corporation.

Some of the advantages of a C corporation are:

It can raise capital by issuing different types of stocks and bonds to investors.
It can attract and retain talented employees by offering stock options and other benefits.
It can deduct certain expenses, such as health insurance premiums and retirement plans, from its taxable income.
It can have a perpetual existence, meaning that it can continue to operate even if some of the shareholders die or leave.

Some of the disadvantages of a C corporation are:

It is subject to double taxation, meaning that it pays income tax on its profits and the shareholders pay income tax on their dividends.
It is subject to more regulations and compliance requirements than other types of entities.
It has less flexibility in allocating profits and losses among its shareholders.
It may face higher legal and accounting fees than other types of entities.

What is an S Corporation?

An S corporation is a legal entity that is similar to a C corporation, except that it elects to be taxed as a pass-through entity. This means that it does not pay income tax at the corporate level. Instead, its profits and losses are passed through to its shareholders, who report them on their personal income tax returns. This avoids double taxation.

An S corporation can have up to 100 shareholders, who must be U.S. citizens or residents. An S corporation cannot have other entities as shareholders, such as corporations or partnerships. An S corporation has a board of directors and officers who manage the business, just like a C corporation. The shareholders also have limited liability, meaning that they are not personally responsible for the debts or obligations of the corporation.

Some of the advantages of an S corporation are:

It avoids double taxation, meaning that it does not pay income tax at the corporate level and the shareholders only pay income tax on their share of the profits.
It can deduct certain expenses, such as health insurance premiums and retirement plans, from its taxable income.
It can have a perpetual existence, meaning that it can continue to operate even if some of the shareholders die or leave.

Some of the disadvantages of an S corporation are:

It has a limited number of shareholders, who must be U.S. citizens or residents.
It cannot have other entities as shareholders, such as corporations or partnerships.
It has less flexibility in allocating profits and losses among its shareholders.
It may face higher legal and accounting fees than other types of entities.

How to Choose Between C Corp and S Corp?

There is no one-size-fits-all answer to this question. The best type of entity for your business depends on your specific goals, needs, and preferences. However, here are some general guidelines to help you decide:

If you want to raise capital from a large number of investors or issue different types of stocks and bonds, you may want to choose a C corporation.
If you want to avoid double taxation and have more control over how you distribute your profits and losses among your shareholders, you may want to choose an S corporation.
If you want to have more flexibility in choosing your shareholders and having other entities as owners, you may want to choose a C corporation.
If you want to have more simplicity in filing your taxes and complying with regulations, you may want to choose an S corporation.

Examples of Businesses That Are Suitable for Each Type of Entity

Here are some examples of businesses that are typically suitable for each type of entity:

C corporations are suitable for businesses that are looking to grow and expand, such as technology startups, manufacturing companies, or retail chains. These businesses can benefit from the ability to raise capital from a large number of investors and issue different types of stocks and bonds. They can also attract and retain talented employees by offering stock options and other benefits.
S corporations are suitable for businesses that are looking to minimize their tax burden and have more control over their profits and losses, such as professional services firms, family-owned businesses, or small businesses. These businesses can benefit from the pass-through taxation and the deduction of certain expenses. They can also have more simplicity in filing their taxes and complying with regulations.

C Corp vs. S Corp: A Comparison of Global Demand

C corporations (C-corps) and S corporations (S-corps) are two types of business structures that have different tax implications and ownership flexibility. Both are separate legal entities that provide limited liability to owners, but they differ in how they are taxed and who can own shares. In this article, we will compare the global demand for C-corps and S-corps based on some statistical data.

C-corps are the most common corporate tax status in the US. They are taxed at the corporate level and then again at the individual level when shareholders receive dividends or sell their shares. This is known as double taxation. C-corps are desirable because there is no restriction on who can own shares, how many shareholders they can have, or what type of shares they can issue. C-corps can also raise capital more easily by selling shares to the public or attracting investors.

According to Forbes, there were about 1.7 million C-corps in the US in 2018, accounting for 5% of all businesses. However, C-corps generated 87% of all business receipts and paid 55% of all business taxes. C-corps are also popular in other countries, especially those with low corporate tax rates or favorable tax treaties with the US. For example, Ireland, Singapore, Hong Kong, and Switzerland are some of the top destinations for US-based C-corps to establish subsidiaries or relocate their headquarters.

S-corps are a special type of corporation that elects to be taxed as a pass-through entity. This means that they avoid double taxation by passing their income, losses, deductions, and credits to their shareholders, who report them on their personal tax returns. S-corps are subject to some limitations, such as having no more than 100 shareholders, having only one class of stock, and having only US citizens or residents as shareholders.

According to the IRS, there were about 4.2 million S-corps in the US in 2018, accounting for 12% of all businesses. S-corps generated 6% of all business receipts and paid 9% of all business taxes. S-corps are less common in other countries, mainly because they are a unique feature of the US tax system. However, some countries have similar structures that allow small businesses to avoid double taxation, such as the UK’s private limited company (LTD) or Canada’s professional corporation (PC).

Based on these statistics, we can see that C-corps have a higher global demand than S-corps in terms of revenue generation, tax contribution, and international presence. However, S-corps have a higher domestic demand than C-corps in terms of number of businesses, as they offer more tax benefits and simplicity for small and medium-sized enterprises (SMEs).

References:

http://corp.delaware.gov/Aug09feesch.pdf

https://www.irs.gov/pub/irs-pdf/i1120.pdf

https://www.irs.gov/pub/irs-pdf/p542.pdf

https://www.forbes.com/advisor/business/c-corp-vs-s-corp/
https://corporatefinanceinstitute.com/resources/management/c-corp-vs-s-corp/
https://www.oberlo.com/blog/c-corp-vs-s-corp

https://www.irs.gov/businesses/small-businesses-self-employed/c-corporations

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

https://www.investopedia.com/ask/answers/what-is-the-difference-between-a-c-corp-and-an-s-corp/

https://www.legalzoom.com/articles/c-corp-vs-s-corp