Both C corps and S corps are common corporate structures, with a C corp being the most common corporate entity. An S corp is a corporate entity that has elected to use a special tax status. In fact, the term “S corporation” is derived from Subchapter S of the IRC.
The main differences between a C corp and an S corp are as follows:
The main consideration regarding taxes is that an S corp is treated as a pass-through entity, avoiding the double taxation that occurs with a C corp. With the traditional C corp setup, both the corporation and corporate shareholders are taxed on profits. However, pass-through taxation allows for the corporate entity to pass on all profits to its shareholders, making shareholders individually responsible for paying for business profits on their personal tax returns.
Due to the lenient tax arrangements of an S corp, company ownership is highly regulated. For instance, a shareholder must either be a US citizen or a resident alien. Also, a shareholder must be an individual and cannot be another corporate entity. Whereas a C corp may have unlimited shareholders, an S corp is restricted to 100 shareholders and therefore is better suited for smaller businesses.
A C corp can issue multiple classes of stock, which will determine ownership rights. An S corp is limited to only issuing one class of stock, ensuring that all members are taxed in the same manner.
Unlike a C corp which can deduct costs for employee benefits, shareholders who are employed by an S corp and own over 2% of the company are not allowed to deduct the costs of any benefits.
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