C-Corporation vs. S-Corporation
Whether you are starting a business or looking to change the current structure of your business entity, it’s important to know the common ways to incorporate. Two of the most common options are that of forming a C-Corporation (C-Corp) or an S-Corporation (S-Corp). The type you pick will really depend on the way your business operates and its long-term goals.
How are they Different?
First, it’s important to know how these two corporations differ. In its simplest form, C-Corps are standard corporations while S-Corps have a special IRS tax status. Within that explanation, two of the main differences lie in that of Corporate Ownership and Taxes.
- Ownership – S-Corps can only have 100 shareholders, and all must be U.S. residents/citizens. S-Corps can’t be owned by other S-Corps, C-Corps, partnerships or LLCs. S-Corps can only have one class of stock. C-Corps, on the other hand, don’t have any restrictions on ownership and they also can have multiple classes of stock. In this way, C-Corps do offer a little more flexibility for a growing business that isn’t quite sure what will happen with ownership as time goes on.
- Taxes – S-Corps are considered pass-through tax entities. There is no income tax paid and the company profits are passed through to the owner’s personal taxes. C-Corps are considered separate taxable entities. The corporation pays taxes and files its own return.
How are they Alike?
Although there are differences between both types of corporations, there are also many similarities. They include:
- Formalities – both types of corporation are required to follow the same rules and formalities for issuing stock, holding meetings, filing reports and paying annual fees, among other things.
- Structure – both have shareholders, board of directors and company officers.
- Legal Entities – both are considered unique legal entities.
- Protection – both have limited liability protection so owners are not responsible for business financial issues.
- Formation Documents – both need to have documents such as Articles of Incorporation to be filed with the state. For more information on formation documents and applying for a tax ID, visit the IRS-EIN-Tax-ID website.