Is C Corporation the same as an S Corporation?
If you are starting a new business and have the option to form it as either a C corporation or an S corporation, you might be wondering which is better. Both structures offer advantages and disadvantages, but if your company has more than 100 shareholders or makes passive income, it is probably best to set up as a C corporation.
While both C corporations and S corporations are popular structures for small businesses, there is a major key difference you need to understand.
- The most common type of corporation is a C corporation. They can be organized under any state’s corporation laws and must have at least one shareholder (owner).
- S corporations are a smaller subset of corporations that meet certain requirements under federal tax law. One major difference between S corporations and other types of companies is that they don't issue shares to their owners; instead, only one class of stockholders owns the company in proportion to the number of shares they hold. Another key characteristic of an S corporation is that it has no limit on its ability to issue additional classes or series within its existing class structure.
Both types of corporation pay taxes on their earnings.
C corporations pay corporate income tax on its earnings, while S corporations are considered "pass-through" entities and therefore don't pay a separate federal income tax. Rather, the profits are passed through to shareholders as dividends and reported on their personal tax returns for inclusion in their personal income.
C corporations have the benefit of converting into an S corporation at some point if they so choose—though this must be done carefully in order to avoid penalties or other negative consequences (for example, if a C corporation tries to convert itself into an S corporation too soon after incorporation).
Double taxation is a disadvantage of the C corporation structure. Double taxation is also seen in S corporations and LLCs.
Double taxation can be avoided by using a partnership or sole proprietorship, but this may not always be possible for businesses that require investors or partners to help finance the business.
The Default Corporate Structure
The default corporate structure is a C corporation. An S corporation is not the default, and it is less common than the C corporation.
While both types of corporations can offer employee benefits, there are some differences. For example, if you have an LLC and you want to give employees paid time off for holidays and vacations, this is more straightforward than if you have an S corporation.
Another difference between a C corp and an S corp is that the latter is restricted to U.S. shareholders. As long as you're a citizen or resident of the United States, you can be a shareholder in an S corp. However, if you live outside of the U.S., your only option would be a C corporation because S corporations are not allowed to have foreign shareholders (except for certain exceptions).
With all that said, if you want to avoid double taxation, and you don’t mind having more than 100 shareholders, then a C corporation is the way to go. If not, an S corporation might be more appropriate for your business.