The Difference Between S Corporation and C Corporation
Choosing the right business structure is crucial. If you are eyeing the possibility of going public, a C corporation might be your go-to choice. On the flip side, small businesses often find solace in the flexibility and tax perks of an S corporation. In this comparison of C corps and S corps, we will cut through the details and highlight the practical differences. Read on.
C Corporation vs S Corporation: The Definition
A C corp is a distinct corporate structure chosen by businesses for its tax advantages and compliance with legal and regulatory requirements. On the other hand, an S corp takes shape as a specific iteration within subchapter S of Chapter 1 of the IRS code. Noteworthy is its ability to channel deductions, losses, income, and credits directly to shareholders for federal tax considerations.
What Is the Difference Between an S Corporation and a C Corporation?
The key difference between an S corp and a C corp is their taxation approach. A C corp retains profits and losses, files separate tax returns, and pays a 21% flat tax on profits. Keep in mind that there is no tax on earnings. S corps are separately taxable entities, meaning they pay taxes at the corporate level.
Another key disparity lies in the formation and ownership. A C corp is the default corporate type, requiring state-specific articles of incorporation. In contrast, an S corp, in addition to state filings, must submit Form 2553.
In terms of ownership, C corps are inclusive with minimal restrictions, allowing virtually anyone to be an owner without a cap on the number. On the other hand, S corps have a 100-shareholder limit and impose more rigid ownership constraints.
Furthermore, S corps are confined to a single class of stock, meaning all shares possess identical rights regarding liquidation and distribution proceeds. In contrast, C corps enjoy greater flexibility and are allowed to have two or more classes of common stock. This distinction in stock structure adds another layer to the key differences between S corps and C corps.
Choose Your Business Structure Wisely
Making the optimal choice between S corp vs C corp requires close coordination with a management consulting service. At Alpha Advisors, we specialize in guiding businesses through this decision-making process. For personalized insights and expert business tax preparation services, consult with us to ensure your choice aligns seamlessly with your unique circumstances!