Differences Between C Corporations and S Corporations

When you form a corporation, you’ll need to decide between forming a C Corporation and forming an S Corporation. (If you know which you’d like to form, you can start organizing your incorporation information in our no-obligation incorporation system.)

To put it into simple terms, a C Corporation is the basic type of corporation. An S Corporation is a normal corporation (C Corporation) that has elected to have special tax status. While there are a few restrictions that apply to an S Corporation, the tax treatment is the primary difference between C Corporations and an S Corporations.

Double Taxation of Corporations

C Corporations and their shareholders face what is referred to as “double taxation”. The corporation itself files income tax returns and pays income taxes while its shareholders do not report any of the business income and expenses on their personal income tax returns. The shareholders report and pay income taxes only on what they are paid by the corporation.

A C Corporation can more easily accumulate capital since the corporation’s tax rate is generally lower than that of the individuals. However, C Corporation shareholders must pay taxes on any dividends received even though the corporation has already paid income taxes - hence the term “double taxation”.

Pass-Through Taxation of S Corporations

An S Corporation, with the consent of all of its shareholders, elects to have special tax status by filing I.R.S. Form 2553 with the Internal Revenue Service. Subsequently, an S Corporation is not subject to income taxes.

S Corporations with more than one shareholder file an informational K-1 tax return. Income is “passed through” to the shareholders (as determined on the last day of the corporation’s tax year) who include in their income their pro rata share of the amount they would have received in dividends if the corporation had distributed 100% of its taxable income for the year to its shareholders.

Losses are likewise “passed through” to the corporation’s shareholders who can use the losses to offset income they may have received from other sources, a significant advantage in the early stages of a business when losses are common. This tax treatment is the reason most small business owners choose to form S Corporations.

A Few Other Differences Between S and C Corporations

Other differences arise mainly from restrictions placed on S Corporations, which can include:

• S Corporations are limited to no more than 100 shareholders
• S Corporations are limited to one class of stock (voting rights can differ)
• Other corporations, Limited Liability Companies (LLC’s), certain kinds of trusts, partnerships, or non-resident aliens cannot own S Corporation stock.
• S Corporations cannot conduct certain kinds of business.
• Limitations on some fringe benefits can apply to major shareholders.

We recommend consulting with an attorney and accountant to fully determine which type of corporation will suit your needs best.

When you know whether you want to form a C or S Corporation, you can quickly and easily start forming your corporation here. Save your information - come back and finish later. There is never any obligation until you choose to place your order.