Credit: Sean Pollock

 

When it comes down to it, looking at the difference between a C-Corp and S-Corp is a matter of structuring the business properly for tax purposes. Both business tax structures provide reduced personal liability, an important part of running a successful company.

While there are other differences, the main difference between a C-Corp and S-Corp is whose income gets taxed. Unlike the S-Corp, the C-Corp pays taxes on their income at the business entity level. The S-Corp, on the other hand, pass their tax burden on to shareholders.

Naturally, tax rates vary, but the income tax liability doesn’t just stop there. Individuals taking contributions from the C-Corp also have to pay taxes on that money, creating a double taxation issue.

While this isn’t one of the benefits of a C-Corp, that doesn’t mean that you should automatically avoid this structure.

 

What is an S-Corp?

Did you know that an S-Corp isn’t actually a separate legal entity, but a tax status? It refers back to the portion of the tax code. Indeed, S-Corps are corporations that meet specific requirements for this tax classification.

The tax status allows them to pass income, losses, deductions, and credits back through to the shareholders for federal income tax purposes. The shareholder pays taxes directly instead of the company.

This is often referred to as pass-through status and allows shareholders to report the income and losses on their personal tax returns.

The tax difference is profound between individuals and companies; the tax rates for individuals may be much lower after deductions and losses are taken into consideration.

 

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Requirements for S-Corp Status

Since the S-Corp is a tax status and not a separate legal entity, it’s important to understand the requirements for companies looking to be taxed under subchapter S of the Internal Revenue Code.

Here are some of those requirements:

  • The company must be incorporated within the U.S.
  • There can only be one class of stock across the entire business.
  • The company cannot have more than 100 shareholders.
  • Although shareholders are allowed by design, there are certain eligibility requirements.

An additional requirement includes, that the shareholders must be resident individuals (actual humans), some trusts and estates, or a tax-exempt organization.

This also means that partnerships, other corporations, and nonresident aliens cannot be eligible shareholders.

 

What Are Some of the Benefits of a C-Corp vs. an S-Corp?

Now that the definitions of C-Corp and S-Corp are established, what are the benefits of the C-Corp vs. an S-Corp? One of the benefits is that the C-Corp can have an unlimited number of shareholders.

This is very important if there are plans to take the company public or to bring in a greater number of shareholders in the future. Compare that with an S-Corp, where you can only have 100 shareholders.

An additional benefit includes that C-Corps may have multiple classes of stock, making it easier to fundraise and maintain decision control.

 

Difference Between a C-Corp and S-Corp

Credit: Jason Goodman

 

What Are the Benefits of a C-Corp vs. an LLC?

LLC stands for Limited Liability Corporation, and it is actually a separate legal entity instead of just a designated tax status. The LLC has members instead of shareholders, and each member shares in the profits of the business.

For businesses looking for outside capital opportunities, the C-Corp often allows better structure for this compared to the LLC. The benefit of the C-Corp over the LLC is the shareholder aspect.

The shares do make a difference, and it’s easier to sell, buy, or transfer shares in order to essentially control the power each shareholder has overall.

Some companies that can work well within the limitations of the LLC format find that the low level of paperwork makes it worth it to stay as an LLC instead of converting the company.

Companies hold limited liability under the law, whether incorporated or organized as an LLC.

 

Managing Corporation Upkeep

Trying to understand how to keep up with the different requirements between an S-Corp and a C-Corp, can be complex, especially for business owners that are just starting out. Tax professionals at inDinero are knowledgeable at analyzing what choice of entity is suitable to meet your business needs.

Contact us today for a free consultation.

Samantha Timmons

Samantha Timmons

Samantha Timmons, J.D., LL.M. is a Senior Tax Director at inDinero. Samantha has over two decades of experience in global tax planning - in-house, law firm and at Big Four firms - advising on tax aspects of operations, acquisitions, restructurings and dispositions. Samantha enjoys her free time skiing, hiking and snow-shoeing throughout the beautiful Colorado Rocky Mountains alongside her two trusty standard poodles - Finneas and Theodora.

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