At the time of starting a business or changing the business structure, the owners evaluate whether they should form an S Corp or a C corporation. While these are the commonest ways of incorporation, the choice depends on business objectives. The similarities and dissimilarities between both of them are discussed below.
The Similarities between an S Corporation and a C Corporation
One of the similarities between an S corporation and a C corporation is that while the former is a standard corporation, the latter is the modified version with a special tax status. S Corporation is so called as it is defined in the subchapter S of IRC. To form an S Corp, the owners are required to file Form 2553 with the IRS, apart from meeting the guidelines set by it. The similarities between C corporation and S corporation are as follows:
1. Limited liability protection: Both the versions of corporation offer limited liability protection, thereby relieving the owners or shareholders from being personally liable for liabilities or business debts.
2. Separate entities: A state filing separates both S Corporation and C Corporation as distinct entities.
3. Filing documents: In order to form an S Corp or C corporation, the documents or the articles of incorporation must be filed with the Secretary of the State. The articles are same for both the entities.
4. Structure: Both consist of key members like officers, directors, and shareholders. While the shareholders own the company, they also elect a board of directors to oversee or direct corporation affairs or make decisions on behalf of the company. However, the directors are not responsible for daily operations. They elect the officers for the purpose.
5. Corporate formalities: The internal or external obligations and formalities are same for both the entities and involve operations like issuing stock, adopting bylaws, conducting or organizing a meeting between directors and shareholders, paying annual fees, filing annual reports and so on.
The Differences between an S Corporation and a C Corporation
Notwithstanding the similarities between the two as described above, there are also a few major differences between them. These are as follows:
1. Taxation: Taxation constitutes one of the major differences when both are compared with one another.
- C corporations:A C Corpis separately taxed when a tax return is filed with Form 1120. While the taxes are filed at the corporate level, there is a possibility of double taxation when there is a distribution of corporate income in the form of dividends. Therefore, the taxation system involves payment of corporation tax at the corporate level and also the payment of tax on dividends at the individual level.
- S corporations:As pass-through tax entities, S corps file federal return via Form 1120S. However, it does not involve any payment of income tax at the corporate level. The profit or loss is reflected on the personal tax returns filed by owners and all taxes are paid at this level.
- Personal Income Taxes. Salary or dividends that are withdrawn from both forms of corporation attract personal income taxes.
2. Corporate ownership. C Corporations have no restrictions when it comes to ownership, whereas there are restrictions with regard to ownership in case of S corporations. In case of the latter, there are some criteria set forth by the IRS in terms of ownership and stock. According to it, an S Corporation cannot have more than 100 shareholders and all shareholders must either be the citizens or residents of the United States. An S Corporation cannot be owned by a foreign national, C Corporation, an LLC, another S corporation or trusts. Except for voting rights, it is mandatory for an S Corp to solely have one class of stock. In comparison, a C Corporation can accommodate multiple classes. Thus, a C Corporation provides more flexibility for growth, expansion of ownership or sale of a company.